So, once again the grand plan for the year (dollar strength) is close to tatters. This has strong echoes of last year, although at least things went to plan for the first ten weeks of the year. From being 11% up, the dollar is now only 3.5% up on the year (using the dollar index). Furthermore, yesterday the dynamics were working in the opposite direction of the perceived wisdom, with US retail sales data for April coming on the weak side, whilst some of the latest growth data in Europe showed the opposite picture (e.g. France). Of course, the yield story has also been a key underlying force, given the reversal we’ve seen in European yields and in particular Germany. The other factor to note yesterday was the downgrade to growth forecasts seen in the UK as the BoE published their latest Inflation Report. This has once again enhanced the perception that rates are going to be on hold for the remainder of the year.
For today, the focus is on US PPI data and the usual weekly claims numbers, with ECB President Draghi speak later today. Beyond that, sterling has managed to shake-off the losses seen in the wake of yesterday’s Inflation Report, cable having risen for the previous four session and touching levels last seen mid-December. The Aussie also continues to power ahead, now above the 0.81 levels. The market has all but prices out any further easing from the RBA, but this is still possible in our view, so the gains may prove to be transitory should the data start to soften.
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