The euro and the pound made a comeback in today’s European session, but the dollar was subdued as investors awaited the Fed’s Beige Book for further direction.
The euro was one of the stronger performing currencies on Wednesday as traders overlooked weaker-than-expected Eurozone CPI figures to bet on a more hawkish European Central Bank at next week’s policy meeting.
Headline inflation fell from 1.9% to 1.4% year-on-year in May’s flash reading, missing forecasts of 1.5%. This was the lowest rate so far in 2017 but there was a less dramatic drop in core inflation. Excluding food and energy prices, CPI eased from 1.2% to 1.0% in May, in line with expectations.
The euro seemed little affected by the slightly weak numbers and rose after the CPI data to break above the $1.12 level. It hit a one-week high of 1.1241 dollars as investors still expect the ECB to drop its easing bias when it meets on June 8 despite this month’s fall in inflation. Eurozone unemployment data was also released today and the latest figure supports the view that the region’s economic recovery is gaining pace. The unemployment rate fell to an 8-year low of 9.3% in April, raising hopes that this would soon translate to higher wage growth.
The jobless rate also fell in the bloc’s largest economy, Germany, hitting a record post-unification low of 5.7% in May. However, German retail sales unexpectedly fell in April, casting some doubt over recent strong consumer survey data.
The pound posted a strong rebound after hitting a 6-week low of 1.2767 dollars earlier in the session. The British currency came under pressure in Asian trading after a YouGov poll projected that the ruling Conservative party in the UK could lose up to 20 seats at next week’s general election while the opposition Labour party could win 30 seats. Such a scenario would create a hung parliament rather than the strong majority that the prime minister is hoping for. However, another poll released later in the day showed the Conservatives’ lead over Labour had increased to 15 points. This helped lift the pound to back above key levels in late European trading to hit a session high of 1.2903 dollars in late European trading.
The Canadian dollar failed to get much of a boost from solid GDP numbers out of Canada today. Annualized growth in Canada accelerated from an upwardly revised 2.7% in the fourth quarter to 3.7% in the first quarter. This was slightly below expectation of 3.9%. However, the month-on-month figure for March beat estimates of 0.2% to come in at 0.5%, pointing to a strong end to the quarter.
The loonie firmed briefly after the data, with USD/CAD falling to 1.3437 before turning higher again to climb to a one-week high of 1.3521. Weaker oil prices weighed on the loonie as WTI crude fell to a 2-week low of $47.83 a barrel ahead of the latest API weekly inventory report.
The US dollar did not fare as well against other currencies, slumping to a near 2-week low of 110.53 yen in late European session. The greenback was weighed by a set of disappointing US data. The Chicago PMI, which measures manufacturing activity in the mid-west of the United States, fell short of expectations of 57.0 to decline to 55.2 in May from 58.3 in April. Pending home sales also disappointed, dropping by 1.3% month-on-month in April instead of rising by 0.5% as expected.
The greenback was unable to get a lift from remarks by Dallas Fed President Robert Kaplan. Speaking in New York, Kaplan said “price pressures are likely building” and reiterated his support for two more rate hikes this year. However, he also voiced concern about the recent softness in inflation, a view shared by other Fed policymakers recently.
Traders will now be looking to the Fed’s Beige Book due later today to gain an insight into regional economic conditions in the US as any signs of weakness would reduce the case for a June rate increase.