Fears over the prospect of a bailout for Portugal were overcome by a further increase in Eurozone inflationary pressures sending the euro back towards its highest in two weeks. Support for the dollar weakened as a series of data elsewhere around the world sharpened demand for alternative currencies on improving prospects for global growth.
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Euro – Consumer prices across the Eurozone increased at an annual pace of 2.6% and provided further ammunition to central bankers of the case for tightening monetary policy across the region. Regardless of the fact that rising energy costs remain a driving force behind inflation, the ECB will sanction a quarter-point increase in its short rate next week to ensure that increasing costs do not become engrained within the system. Inflation rose to its fastest pace since October 2008 and has now breached the ECB’s 2% ceiling for four consecutive months. The single currency added a penny on its midweek close rising to as high as $1.42233 and was further buoyed by a tightening German labor market as unemployment fell by a larger than forecast 55,000 bringing the rate down to 7.1%. The rise in the euro contrasts with resurgent fears over Portugal’s likely need for financial aid from its partners. The likely boost to the yield differential above the dollar resulting from the April ECB meeting may still not prove to be the pillar of support that investors expect should sovereign risks increase.
U.S. Dollar – The greenback is on the defensive ahead of initial claims data later on Thursday. The report is expected to show a near-unchanged reading of 380,000 first-time benefit claims. The March Chicago PMI report due later in the morning is due to back away from evidence of recent strength. Factory orders for February data is also likely to simmer from a 3.1% pace to a modest 0.5% improvement. The dollar seems challenged as a result of stronger data around the world and that has driven the dollar index lower by 0.5% to 75.73.
British pound – Quite how you frame such strong data is widely open to interpretation of course. The pound was driven sharply higher against the dollar to $1.6151 allegedly inspired by a Nationwide building society report on recovering home prices. Such a positive reading on the state of U.K. housing should really be viewed in the dim light of a salt cavern not only on account of the prospects for British growth but also due to the health of the financial system. It will be a long day before banks build up an appetite to throw the volume of money at the housing market they became accustomed to during the boom. Still, the report made for a short-lived argument that the rising value of housing would spur the Bank of England in to action. However, member of the MPC David Miles warned that the uncertainty within this sector was so great that it will be some time before the Bank could properly formulate a coherent or predictable view that could be written in to its thinking. And so the pound for a second day erased a healthy start and ended up with nothing to show. Bulls once again found themselves pushing on the proverbial shoestring leaving the pound struggling beneath $1.6100.
Japanese yen – The Ministry of Finance revealed that it sold ¥692.5 trillion to stem the rise in its currency after the earthquake sparked fears that domestic investors would repatriate funds and force up its value. The number matches estimates made at the time of the intervention and equates to $8.4 billion, although the data likely excludes coordinated efforts by fellow central bankers. Data released on Thursday continued to show a recovery in February and ahead of the tsunami disaster that crippled the Japanese economy. Housing starts and construction orders rose sharply while even supermarket sales rose as deflationary pressures eased. The Nomura JMMA manufacturing PMI reading for March understandably relapsed in to contraction territory. The yen is gaining after a weaker start against the greenback and currently trades at ¥82.73.
Aussie dollar – It didn’t take much to propel the Aussie to a further record high against the dollar with the catalyst a stronger than forecast retail sales report for February as shoppers replaced items lost or damaged during the floods. Sales grew by 0.5% building on a 0.4% gain the previous month driving the Aussie to as high as $1.0361. A report also showed a 0.5% monthly increase in private sector credit lifting the volume of loans by 3.4% over one year ago. However, there was less reason to follow-through after data showed a slide in building approvals of 7.4% in February.
Canadian dollar – The pleasurable flight of the loonie was rudely interrupted ahead of a January GDP report that saw the Canadian dollar breach its midweek peak only to fall back to $1.0304. The growth report is due out shortly and is expected to match the strongest pace of growth in 10-months.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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