Global overview
The U.S. dollar’s surge to two-month highs was cooled as cautious optimism over a deal to raise America’s borrowing cap underpinned risk sentiment. The dollar, on track for a second straight weekly rise, hovered near three- and seven-week peaks versus the UK pound and euro, respectively, and remained within arm’s reach of six-month highs against the yen. Oil’s bounce this week above $70 boosted Canada’s commodity-backed currency. The greenback has enjoyed a burst of strength over recent weeks as signs of a resilient U.S. economy dovetailed with hawkish remarks from Federal Reserve officials. As a result, the odds of the Fed raising rates in June have jumped to around 40%. That’s an about-face from a month ago when markets had assigned about a 20% chance of the Fed cutting rates next month. The dollar’s resurgence from recent one-year lows has been compounded by a market that’s maintained elevated long positions on the euro, or bets on the single currency’s continued rise. The spotlight today will shine on Jerome Powell, the head of the Fed, whose 11 a.m. ET comments could shed light on the path for central bank policy. Canada issues an update on the consumer with retail sales due at 8:30 a.m. ET.
Euro falls to late March low
The euro steadied Friday but not before it extended its slide to late March lows against the U.S. dollar. A mix of negative forces have resurfaced to topple the euro from last month’s one-year highs. Those forces include a marked reduction in economic optimism across the bloc, which coincided with mounting signs of resilience in the world’s biggest economy, and a rising risk of the Fed raising rates as soon as next month. Market positioning is another vulnerability for the euro as the many holding longs, or bets on its continued rise, are compelled to head for the exits as the euro meanders lower.

Sterling edges up from 3-week trough
Sterling pared some of its weekly declines that pushed it to three-week lows against the greenback, but it was still at risk of a second decline in as many weeks. Transatlantic data of late have painted a more resilient picture of U.S. growth compared to Britain. Consequently, the central bank policy divergence theme that helped power the pound to one-year highs last week has dissipated. Meanwhile, the run of solid U.S. data has markets ramping up bets on another Fed rate hike and potentially as soon as next month. And while the Bank of England also appears to have more rate hiking to do, many worry that even higher borrowing rates for longer could be bad for the UK’s growth prospects.

Currencies from Canada, Mexico rise
The Canadian dollar has sidestepped its otherwise stronger U.S. counterpart and was on pace for a winning week. While the Fed may not be done raising interest rates, the same could be said of Canada after domestic inflation unexpectedly ticked up to a 4.4% annual rate in April, the first rise in 10 months. The market doesn’t expect Canada to raise rates next month after retail sales fell 1.4% in March which met market expectations and served as the second straight contraction in consumer spending amid high borrowing rates and elevated inflation. Canada forecast April retail sales would rise 0.2%. Recent odds pegged a Canadian rate hike at around a 60% likelihood by July. Mexico’s peso hovered near 2016 highs against the U.S. dollar despite the Bank of Mexico pausing rate hikes and leaving borrowing rates steady at record highs of 11.25%, an alluring level that tends to buoy the peso during periods of improved risk sentiment.

Euro slips toward bottom of weekly range
Table: rolling 7-day currency trends and trading ranges

Key global risk events
Calendar: May 15-19

Have a question? [email protected]
*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.