OVERNIGHT MARKET SUMMARY
The U.S. dollar stabilized overnight but was still left licking its wounds near a six-month trade-weighted low. The dollar’s slide over recent days has been fueled by mounting political uncertainty in the U.S., which has dampened already low expectations for a bold fiscal stimulus package from the Trump Administration. The widening crisis at the White House added to an already softer U.S. dollar that has been damaged by a marked deterioration in U.S. economic data since the first quarter. The softer U.S. data of late has helped push June Fed interest rate hike expectations down from roughly 85% last week to around 60% this morning. The greenback remains vulnerable to any sustained period of political uncertainty that could not only derail expectations for fiscal stimulus and continued monetary policy normalization from the Fed, but also potentially begin to negatively impact the real economy.
The euro pared some of its gains overnight but remains within striking distance of a six-month peak against the greenback. The euro’s rally paused after soaring against the dollar amid a growing list of solid euro zone economic reports and mounting political uncertainty in the U.S. This morning, the minutes from the ECB’s late April Governing Council meeting showed that while policymakers were encouraged by recent economic improvements, they remained worried that even modest adjustments to their language could result in an undesired “signaling effect” on financial markets. The minutes dented some expectations that the ECB will adopt a less dovish tone at its June meeting.
Sterling jumped to its highest level in eight months against the greenback after U.K. retail sales overnight largely allayed market worries about rising inflation eating into consumers’ purchasing power. The 2.3%(m/m) jump in April retail sales eclipsed forecasts for a rise of 1.0%(m/m) and followed hotter than expected CPI and generally solid employment figures this week.
Brazil’s real tumbled by over eight percent at one point this morning and the nation’s BOVESPA equity index was set to open nearly 10 percent lower after news that President Michel Temer was allegedly caught on a secret audio instructing a business leader to pay bribes.
USD: The U.S. dollar index recovered from a six-month trough overnight as heavy selling in the greenback this week paused. The news that the Justice Department had assigned former Director of the FBI, Robert Mueller, as a special prosecutor to investigate Russian interference in America’s 2016 presidential election was seen as marginally supportive. The well-respected Mueller is seen as an a-political figure that will drive the investigation into the Russia story and possibly, into the administration’s firing of FBI Director James Comey. This morning’s data showed weekly jobless claims fell to 232,000 and that the Philadelphia Fed survey of regional business activity rose in May. The solid U.S. data added to the greenback’s marginally improved tone this morning.
EUR: The euro slipped from a six-month peak against the more stable dollar overnight. The euro has benefited from the recent run of solid economic data in the 19-member bloc and from the broad decline in the greenback over recent weeks. This morning, the minutes from the ECB’s April 27th Governing Council meeting showed that officials, despite finding recent economic trends encouraging, remained very wary about making significant changes to their language. The minutes stressed that changes in language should be made very gradually and that even very minor adjustments in communication could result in undesired “signaling effects”. The ECB is worried about financial market conditions tightening and potentially undermining some of the nascent progress that has been made on the bloc’s economy. The minutes dented some expectations that the ECB could shift to a less accommodative monetary policy bias at its next meeting in June, a scenario that has added to the single currency’s improved tone over recent weeks.
JPY: The Japanese yen added to its impressive gains from the previous session to touch on its highest level in over three weeks overnight. The yen has rallied against the generally softer U.S. dollar thanks to the slide in U.S. Treasury yields and the broad flight to safety across global financial markets. The selloff in global stocks, including the over 300-point drop in the DOW yesterday helped bolster the appeal of the safe-haven yen.
GBP: The British pound jumped to its highest level in eight months against the U.S. dollar overnight after U.K. retail sales for April jumped by 2.3%(m/m), well above the 1.0%(m/m) forecast. The jump in retail sales last month helped allay some worries about fading consumer spending amid a backdrop of moderating wage inflation and rising price pressures. The report also comes on the heels of yesterday’s generally positive U.K. labor market data and Tuesday’s hotter than expected CPI figures for April.
BRL: Brazil’s real, already reeling from this week’s selloff in emerging market assets, tumbled by over eight percent at one point this morning after news that the nation’s president was recorded instructing a business leader to pay bribes to the former political official that was the mastermind behind last year’s impeachment of former president Dilma Rousseff.
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