OVERNIGHT MARKET SUMMARY
The U.S. dollar index gave up all of its previous session’s gains to fall to a new six-month trough overnight. The dollar’s trade-weighted index remains on track to put in its worst weekly performance since August 2016 amid a climate of mounting political uncertainty in Washington. The recent news that has investors increasingly nervous includes President Trump’s abrupt firing of the FBI director, allegations that the president pressured the FBI chief to drop an investigation in the former national security advisor and the widening probe into Russia’s connection in the U.S. 2016 presidential election. Investors, who had bid the greenback to a 14-year peak in early 2017, have become increasingly skeptical that this administration, which has been embroiled in scandals and crisis, will be able to deliver on campaign promises for bold fiscal stimulus.
The soft U.S. economic data of late has coincided with the mounting political drama in Washington and has added to the greenback’s broadly heavier tone. The dollar enjoyed a brief respite from selling pressure in the wake of yesterday’s better than expected jobless claims and Philly Fed data, but quickly succumbed to renewed pressure ahead of the weekend. The combination of soft economic reports and increasing political risks have pushed the odds of a dollar-supportive rate hike in June from around 85% last week to about 70% this morning.
The euro has benefited from the broadly heavier U.S. dollar recently but has also enjoyed increasing support as a result of an improving economic backdrop in the 19-member bloc. Rising inflation, broadly improved sentiment surveys and GDP data that has confirmed the generally stolid growth backdrop have resulted in expectations that the ECB could adjust its language to reflect a slightly less dovish monetary policy bias next month.
Sterling rose again overnight and looks on track to end the week near an eight -month peak against the U.S. dollar. The pound has enjoyed a week of solid data that included a hotter than expected CPI print, a solid U.K. unemployment report and a jump in April’s retail sales. Still, given the looming uncertainty of the Brexit negotiations, the pound’s upside appears somewhat more limited above current levels.
USD: The U.S. dollar index fell back to a six-month low this morning and appears on track to put in its worst week in nine months. The greenback’s soggy tone is the result of a combination of weaker U.S. economic data and mounting political uncertainty in Washington. Recent stories have fanned worries about stability in Washington and included news on the president’s firing of the FBI director, the alleged pressure put on then-FBI Chief James Comey to drop an ongoing investigation into former national security advisor Michael Flynn as well as the widening investigations into alleged Russian meddling in America’s presidential election. All of these distractions have not only painted a picture of a White House in disarray, but also of an administration that is likely incapable of focusing on a comprehensive fiscal stimulus package in the current political environment. Economic data of late has also dented the dollar’s appeal as the soft start to the first quarter could be dragging on into the early part of Q2. This week’s lack of major U.S. economic news has likely exacerbated some of the dollar’s recent weakness, which will likely remain in place until upcoming reports can paint a picture of a recovering economy in Q2.
EUR: The euro recovered all of yesterday’s brief losses against the dollar to trade at a new six-month peak this morning. The single currency is capitalizing on the U.S. dollar’s broad weakness of late but is also benefiting from an improving economic backdrop in the 19-member euro zone as well. Recent improvements in inflation, in key sentiment gauges and the overall solid performance in the bloc’s economy in the first quarter have suggested an increasing chance of the ECB adjusting its language at its next Governing Council meeting in June to reflect the improved backdrop. Yesterday’s ECB meeting minutes from April highlighted a still cautious ECB that may be hesitant to make any major adjustment to its policy stance in June. Still, investors remain optimistic that the bank is inching toward a less dovish policy bias- a scenario that should keep the euro supported.
GBP: A run of solid U.K. economic reports this week have helped sterling rise back to an eight-month peak against the broadly heavier U.S. dollar. Hotter than expected CPI data on Tuesday, the drop in the U.K.’s unemployment rate to its lowest level in over 40 years and a retail sales figure that eclipsed market forecasts yesterday all help reassure investors that the U.K. economy is likely stronger than previously feared. Still, demand for the pound above current levels may prove less robust, given the looming uncertainty of the Brexit negotiations likely to begin after the U.K.’s early election next month.
CAD: The Canadian dollar pared some of its earlier gains that it enjoyed as a result of sharply higher crude oil prices overnight. Instead, the loonie took its cue from slightly cooler than expected Canadian CPI figures this morning. Annual CPI came in at a steady 1.6%(y/y) in April, slightly below the 1.7%(y/y) expected. Separately, retail sales jumped by 0.7%(m/m) in March, well above the 0.3%(m/m) expected. Still, the fact that all major gauges of CPI remain below the BOC’s 2.0% target and suggests the bank is not likely to adjust its cautious policy bias anytime soon.
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