Global Themes

The U.S. dollar built on its Monday head of steam to reach its strongest levels in a week. The past month has been tough on the dollar as underwhelming U.S. data served to push out expectations for when the Federal Reserve might boost interest rates for the first time in 10 years. The dollar last week hit three month lows against the euro and its weakest in nearly four against a currency basket. The dollar’s recent stretch of under performance has tempted many market players to sell recently outperforming currencies, like the euro, sterling and loonie, at better levels and buy back the dollar. The dollar’s tentative turnaround was also boosted today by news that the European Central Bank (ECB) plans to momentarily beef up its pro-growth bond purchases. An ECB official said the bank would buy more bonds through June then likely cut back on the purchases in July and August when bond markets tend to go into a summer lull. Got a bill to pay in sterling? Britain’s currency has tumbled more than three cents from recent five-month peaks, injured today by news of the first contraction in consumer inflation in more than half a century. Canada’s loonie fell to 2 ½ week lows.

GBP

Sterling took several steps back from recent five-month highs above $1.58 as election elation subsided and area inflation somewhat unexpectedly tipped into the red for the first time since 1960. Annual consumer prices were down 0.1 percent in April versus forecasts of no change or a zero reading. No imminent sign of a bottom in falling U.K. inflation suggests it may be a longer wait for an eventual interest rate hike by the Bank of England. More catalysts lurk for the pound in BOE minutes on Wednesday and U.K. retail sales on Thursday.

EUR

Good news to share today with your euro customers as the single currency has fallen nearly three cents from last week’s three month highs. The ECB shoved the euro lower after a central bank official said the bank would crank up its monthly bond purchases from €60 billion a month in May and June due to summer seasonal factors. Bigger bond purchases over the short run could have a meaningful impact on the central bank’s balance sheet which is inherently negative for a currency. The move also suggested the recent explosion in European bond yields was unwelcome and counterproductive for the region’s recovery by making borrowing costs less affordable. Markets found another euro sell signal in news of a bigger than expected decline in German investor optimism in May, with the ZEW index slipping to 41.9 from 53.3, more than forecasts of 49.0. The shaky and uncertain shape of Greek finances added to the euro’s headwinds.

USD

Already benefiting from European Central Bank (ECB) plans to beef up its balance sheet over the next month, and news of the lowest U.K. inflation in more than half a century, the greenback garnered more support from robust news on U.S. housing. Housing starts fared the best in more than seven years in April, soaring 20.2 percent to 1.14 million units, easily crushing forecasts of 1.02 million units. Building permits, a gauge of future housing activity, and considered less volatile than housing starts, also topped forecasts with a 10.1 percent increase to 1.143 million, outpacing forecasts of 1.060 million units. The solid prints were consistent with an economy starting to rebound from its listless start to the year, keeping alive expectations for a Fed interest rate hike this year, the narrative responsible for much of the greenback’s out-performance over the past year.

CAD

A rejuvenated greenback notched May 1 highs against the loonie near C$1.22, its strongest in more than two weeks. The U.S. currency’s recent decline has given way to enticing levels to pare back exposure to outperformers such as the loonie. Fundamental catalysts loom for the loonie on Friday when area consumer inflation and retail sales come due. Forecasts point to more volatility for the loonie with annual inflation expected to slow to 1.0 percent from 1.2 percent, and growth in consumer spending forecast to slow to 0.3 percent from 1.7 percent last time.