Euro Gains Amid Shifting ECB Sentiment While Dollar Defensive

  • New daily high for euro as big option expires, UST yields drop
  • Canadian dollar slips to lowest in a week as commodities fall

Why the ECB Isn’t Concerned With Slow Inflation

The euro briefly rose above 1.1200 versus the dollar and then remained slightly beneath the level as traders sought an equilibrium after conflicting inputs regarding euro-area monetary policy.

The Bloomberg Dollar Spot index, meanwhile, showed the greenback declining less than 0.1 percent. The dollar dropped versus seven of its G-10 peers, though those losses were offset by gains against resource-sensitive currencies as oil and commodity prices fell. U.S. data showed robust incomes and spending.

  • Traders are cautious before month-end when portfolio-rebalancing flows are usually seen and ahead of key economic data scheduled for Thursday and Friday, including the U.S. May jobs report 
  • Fed Gov. Brainard said it would be appropriate to bring the fed funds rate closer to its neutral level “soon,” given labor market strength, economic momentum and a brighter outlook abroad; time for change in central bank’s balance-sheet policy “is coming into clearer view”
  • EUR/USD rose to fresh high 1.1205, adding to gains seen after Reuters reported that the ECB may upgrade its economic assessment when it meets June 8. The ECB may remove a reference to downside risks in favor of language that shows a more balanced outlook, Reuters said. 
    • The spike to a new session high came only hours following a euro drop to its lowest in more than a week as traders pared long positions after soft German inflation data seemed to validate the cautious approach aired by ECB President Draghi on Monday. The euro’s gains had been briefly capped by option-related offers ahead of 1.1200 where a large expiry rolled off at the 10am ET option cut, coinciding with the fresh high in the pair
  • The USD’s broader tone was also undermined by a decline in U.S. Treasury yields, as the 10Y UST yield traded at a new session low of 2.2168%; the yield had risen to a fresh high in the wake of data that showed the March PCE price deflator, the Fed’s preferred measure of inflation, was revised up to 1.9% y/y from a prior reading of 1.8%, though April had a slowdown to 1.7%. The data also showed that April personal income and spending both rose 0.4%, in line with estimates. Other data showed a steeper-than-expected drop in May Conference Board consumer confidence.
  • USD/JPY fell back to below 111.00 after a brief rebound to near 111.20, closely tracking the swings in U.S. yields, and is trading ~110.77. The pair fell as low as 110.67 as bids were filled and stop-loss sell orders tripped under the overnight low of 110.78
  • The Canadian dollar tracked a decline in crude oil and commodities, with USD/CAD rising to its highest in almost a week at 1.3506 in morning trading. The Canadian currency rebounded in afternoon trading to send the pair to a fresh low of 1.3451 as oil pared losses. The Canadian 1Q current account deficit widened to C$14.05b vs estimates for a deficit of C$12.0b
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