Global Themes

Modest gains Friday were enough to lift the U.S. dollar to fresh highs. The dollar index scored a new 2018 peak while the yen dipped to four-month lows. Sterling and the euro kept near four- and five-month lows respectively while the Canadian dollar was little changed ahead of key data that could make or break the case for an imminent rate hike. The dollar remains on a roll thanks in part to optimism about America’s growth outlook and pessimism about all things politics in Italy. Regional business surveys this week from the U.S. topped forecasts, suggesting full steam ahead for the Federal Reserve to raise lending rates next month. Across the Atlantic, growth has slowed while reports of a radical policy agenda by Italy’s populist parties trying to form a coalition government have seemingly put the nation’s sovereign credit rating at risk.

CAD

A surprise moderation in Canadian inflation tripped the loonie and weakened the case for the Bank of Canada to raise interest rates later this month. Headline inflation unexpectedly slowed to an annual rate of 2.2% in April from 2.3%. Retail sales were mixed, up 0.6% in April but excluding auto sales spending unexpectedly contracted. The tamer reading of inflation moved the odds of a rate hike to 1.50% on May 30 down to about 30% from nearly 50% before the data. Weaker oil below $72, coupled with uncertainty over the fate of the NAFTA trade pact, added traction to the loonie’s descent.

GBP

No royal treatment for the pound with the U.K. unit poised for its 4th decline in 5 weeks. Sterling sputtered against the stronger greenback while improvements in area jobs data this week weren’t seen as sufficient to put a near-term interest rate hike from 0.5% more firmly on the table. U.K. inflation looms next week with consumer prices due on Wednesday. A continued trend of moderating inflation, currently at 2.5%, toward the Bank of England 2% goal would suggest low rates for longer, a scenario that could keep the pound biased downward.

EUR

The resurfacing of political risk and uncertainty in the euro zone’s No. 3 economy had the euro on track for its 5th decline in as many weeks, its longest skid in years. A mix of factors have emerged over recent months to drive the euro sharply lower. They include an economy that’s hit a soft patch, pushing out of ECB rate hike expectations until deeper into 2019, and rising political risk and uncertainty in Italy. Populist parties in Italy in talks to form the next government reportedly favor tax cuts and welfare spending that could balloon already bloated budget deficits, potentially putting the country’s sovereign credit rating at risk, a scenario that could drive up borrowing costs and strangle growth.

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