The euro was one of the best performing major currencies after surging on upbeat data out of the Eurozone. The single currency benefitted from a weaker dollar which was hurt by negative reports about the US President and his disclosure of sensitive information to Russian officials. The pound was briefly boosted by strong UK inflation data.
The euro rallied to its highest level in six months against the dollar to reach $1.1088, as it was driven higher by upbeat data. The German ZEW index of economic sentiment improved further in May to reach its highest since July 2015, rising to 20.6 from 19.5 points in April. Germany is the Eurozone’s largest economy. Meanwhile, a second estimate of Eurozone GDP for the first quarter confirmed the initial reading that the economy expanded 0.5% quarter-on-quarter. The euro surged to a five-week high against the pound to reach 0.8595 and versus the yen it rose to 125.80 yen, the highest in more than a year.
The overall growth outlook for the Eurozone looks healthier and this raises optimism that the European Central Bank could start tapering its stimulus measures soon. Meanwhile in the US, there are concerns that the Federal Reserve may not hike rates in its June policy meeting if softer US economic data continue to come in. Should the ECB have a less dovish stance in June, then this could further strengthen the euro against the dollar as the monetary policy divergence between the ECB and the Fed may be narrowing if Eurozone data improve and while US data deteriorate.
Aside from weak US data, the market’s focus was on US politics. The dollar was hurt by reports that US Presiden
Donald Trump leaked classified information to the Russian foreign minister in a meeting last week. President Trump defended his actions in tweets today, saying he had “the absolute right” to do it. The political turmoil in the US raises concerns that there could be legislation delays and barriers to Trump’s growth agenda.
The dollar index has fallen to a six-month low below 99 points. The greenback dipped against the yen on disappointing US housing data today. After reaching a session high of 113.72 yen, the dollar dropped to 113.37. Separate data on industrial output helped cushion the dollar’s decline. Industrial production rose the most in more than three years in April, up 1.0% month-on-month from March, versus a 0.4% gain expected. Data prior to this was not as upbeat. US housing starts fell 2.6% in April, the second consecutive monthly drop, and reflected an annual rate of 1.17 million units of single-family homes. This followed a downwardly revised rate of 1.20 million units in March. Economists had forecast housing starts to rise to a rate of 1.26 million units. A weak housing sector could risk dragging down growth in the second quarter, following a weak first quarter GDP.
Sterling spiked to a high of $1.2956 after data showed UK inflation jumped more than expected in April to hit its highest since 2013. Annual CPI rose from 2.3% in March to 2.7% in April, beating estimates of a 2.6% print. The pound’s rally after the data was short-lived and it subsequently moved lower to touch a session low of $1.2875. Investors were less likely to take the pound any higher ahead of more risk events. UK retail sales and the employment report are due on Wednesday.
Oil prices have moved off Monday’s highs and the commodity-linked Canadian dollar consolidated recent gains. WTI rallied strongly yesterday on talk of an agreement between Saudi Arabia and Russia – two major oil producers – to extend the OPEC output cut deal to March 2018. WTI remained close to the $49 a barrel level today after hitting a high of $49.63 on Monday. Focus remains on the May 25 – 26 OPEC meeting. Meanwhile, USD / CAD tested the key $1.3600 after failing to rise above $1.3658 earlier today. Upcoming Canadian data on inflation and retail sales due on Friday could impact the loonie.