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Data keeps the dollar biased higher

Euro’s downturn reinforced by German recession, sterling whacked by UK growth concerns. C$ slides; U.S. data surprise to upside.

Global overview

It was new highs for the U.S. dollar and new lows for the euro after data showed that Europe’s biggest economy tipped into recession to kick off 2023. Broad based gains lifted the greenback to three- and seven-week peaks against rivals from Canada and Britain, while the euro fell to eight-week lows. Revised data revealed that the German economy unexpectedly contracted by 0.3% in the first quarter after it shrank by 0.5% during the fourth quarter. Since its fall last month to one-year lows, the greenback has continued to staircase higher as it’s seen as a safe harbor from worries about a potential U.S. debt default and mounting signs of a slowing global economy. Sterling remained on the back foot after another hotter than expected UK inflation report stoked worries about the British economy’s underlying health. Next up for the dollar will be numbers today and tomorrow on the U.S. economy that could shed light on whether the Fed is done raising interest rates. Weekly jobless claims and revised first quarter growth are on tap today, followed by consumer spending and inflation Friday. Ahead of the data, markets assigned about a 1 in 3 chance of the Fed hiking rates from 5.1% in June.

Euro’s downturn reinforced by German recession

The euro fell to eight-week lows against the U.S. dollar after fears about the health of the bloc’s largest economy were realized. Germany’s economy spent a second consecutive quarter going backward, meeting a popular definition of recession. The economy’s 0.3% contraction last quarter was unexpectedly relative to forecasts of no change. Still, the weakness wasn’t a complete shock following a parade of downbeat numbers. Data, meanwhile, continues to paint a worrisome picture of second quarter growth which may expose the euro to increased downside risk over the near-term. A fall below 1.07 would rob EUR/USD of its 2023 gain after being up around 3.5% for the year a month ago.

Chart: Germany falls into recession after all. Germany: Ifo manager survey and GDP growth.

Sterling whacked by UK growth concerns

The UK pound sank to seven-week lows against its U.S. rival as a trifecta of worries continued to weigh on sentiment. High inflation and rising interest rates are fanning UK growth concerns. The Bank of England faces a delicate balancing act of trying to tame inflation while not inducing a hard landing in which growth slows sharply and puts meaningful upward pressure on unemployment. The BOE’s policy predicament, coupled with reduced expectations for the Fed to cut rates this year, has spurred GBP/USD to surrender three cents, or 2.5%, since it ascended to one-year peaks earlier this month.  

Chart: UK growth concerns dog sterling. GBP/USD YTD activity.

C$ slides; U.S. data surprise to upside

Broad based U.S. dollar gains knocked the Canadian dollar to three-week lows. Weaker oil below $73 weighed on the loonie, along with uncertainty over the Fed’s plans for interest rates over the summer. Markets assign a low but rising risk that the Fed may need to raise borrowing rates again if inflation continues to make a slow descent back to policymakers’ 2% goal. Meanwhile, further signs of a resilient U.S. economy added to the greenback’s revival. Contrasting weakness abroad, U.S. first quarter growth received a surprise upgrade to a 1.3% annual rate, compared to forecasts to go an unrevised 1.1%. Weekly jobless claims came in lower than expected at 229,000 versus forecasts of 245,000. Today’s data keeps intact expectations of fastest U.S. second quarter growth of around 2.9%.

Chart: C$ falls to 3-week low. USD/CAD YTD activity.

Euro, sterling and C$ slip toward bottom of range

Table: rolling 7-day currency trends and trading ranges

Table: Rolling 7-day currency trends and trading ranges.

Key global risk events

Calendar: May 22-26

Table: Key global risk events calendar.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.

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