USD

The Dollar index surged by around 0.9% yesterday on-route to a seven-week high, although it has pulled back slightly this morning. Positive economic data, hawkish Fed sentiment, and hints of progress on the debt ceiling negotiations drove the move.

Yesterday’s lower-than-expected jobless claims caused some traders to reconsider their outlook on US interest rates. If the jobs market remains healthy while inflation persists, the Fed may have more room for cuts than previously thought. As a result, markets are now pricing in a 40% chance of a June hike after many thought the Fed would almost certainly hold, and some even called for rate cuts by year-end. The recent shift in sentiment will make today’s monetary policy panel discussion in Washington all the more intriguing, with Fed Chair Powell set to deliver remarks.  

EUR

The Euro is back in the green today for the first time since Monday as the Dollar rally cools slightly heading into the weekly close. However, despite eating away at some of its losses, EUR/USD appears destined for its second-straight week in the red after last week’s drop of over 1.5%.

On the data front, Germany’s producer price inflation declined year-on-year for the seventh consecutive month, reaching a 25-month low of 4.1%. Prices rose at a slower pace across various categories, including intermediate goods, energy, and durable and non-durable consumer goods. However, prices increased monthly by 0.3% while markets anticipated a drop of 0.5%.

GBP

Like many of its major counterparts, the Pound benefits from a pullback in the Dollar as GBP/USD looks to recover some of this week’s losses. The pair fell over 0.6% yesterday, although this morning’s rally leaves it down only modestly on the week.

The blank slate on the UK calendar today means GBP traders can begin to look ahead to next week, with services and manufacturing PMI data on Tuesday, inflation numbers set for Wednesday, and retail sales data on Friday to close out the busy week.

JPY

After posting losses for the last six days, the Japanese Yen is finally seeing some gains this morning. However, despite the slight bump higher, the Yen remains deep in the red for the week – down roughly 2% this week against the Greenback heading into the final US session.

While today’s rebound can be partly attributed to a softer Dollar, JPY also received a boost overnight after Japan’s April inflation data release showed the headline inflation rate rose unexpectedly to 3.5% year-on-year against an expected slowdown to 2.5%. In addition, the core inflation rate also reached a three-month high of 3.4%, challenging the BoJ’s expectation of inflation returning below its 2% target in the near future.

CAD

The Loonie is up around 0.2% this morning after sustaining a 0.35% drop against the Greenback yesterday. Yesterday’s decline was fueled by BoC Governor Macklem’s comments that April’s inflation rise was just an anomaly, and he believed prices would resume falling again.  

This morning, Canadian retail sales numbers for March were released, with both headline and ex-Autos numbers showing declines of 1.4% and 0.3%, respectively. While the headline figure was in line with expectations, the decline in the ex-Autos figure was less than the 0.8% drop initially expected. The report also featured a preliminary estimate for April sales, suggesting a modest 0.2% increase for the month.

MXN

The Mexican Peso is moving higher this morning – up over 0.4% against the Dollar today despite yesterday’s Bank of Mexico decision to hold rates and today’s unimpressive retail sales data out of Mexico. On the Banxico front, the decision to keep rates at 11.25% was widely expected, with the Bank stating its intentions to maintain its current policy for an extended period.  

Meanwhile, March retail sales in Mexico grew by 2.5% compared to the previous year, against expectations of a 2.9% increase. While there were improvements in motor vehicles, spare parts, fuels, and lubricants, there were significant drops in hardware, household goods, and groceries. On a month-on-month basis, March sales remained flat after dropping 0.3% in February.   

BRL

The Brazilian Real is on pace for its first losing week since mid-April as the LATAM currency struggled to find footing against the stronger Greenback. Despite the pullback, BRL remains within striking distance of the June 2022 highs it has tested multiple times since April. However, the prospect of a less hawkish Brazilian Central Bank, partly due to pressure from the Brazilian government, and the potential for a more hawkish-than-expected Federal Reserve, may weigh on BRL moving forward.

In other news, a report surfaced yesterday that Brazil’s Finance Ministry is set to revise its GDP forecast for 2023 to 1.9%, an increase from the previous projection of 1.6%. This revision makes next week’s inflation data out of Brazil all the more intriguing, as signs of an economic recovery amidst softening inflation could increase expectations for rate cuts by the Brazilian Central Bank later this year. 

CNY

After a dismal performance for most of the week, the Chinese Yuan rebounded slightly this morning after Chinese banks stepped in to support the currency. Market action indicates that state-owned banks, which often trade on behalf of the PBoC, were trying to curb the Yuan’s depreciation by entering CNY-to-USD swaps. Despite the intervention, the offshore Yuan is still pacing for its most significant weekly loss since February after bouncing off the December low yesterday.

Focus now shifts to the PBoC interest rate decision set for May 21 at 9:15 PM EST. The Bank held firm on rates in their last meeting, but the string of shaky economic data out of China since then may cause them to change their tune this time around.