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Dollar tracks Treasury yields higher

Euro flirts with recent bottom, data knocks sterling to 1-month low, and USD/CAD climbs to 1-week peak.

Global overview

The U.S. dollar rose toward recent highs as Washington’s debt stalemate remained unresolved while fresh numbers from Europe highlighted the fragile health of global growth. The U.S. dollar index climbed toward recent two-month highs while rivals from Canada and Britain fell to one-week and one-month lows, respectively. The euro slipped toward recent seven-week lows against its U.S. counterpart after a spate of mostly weaker than expected data. The dollar is serving as a safe harbor from uncertainty over whether Washington will strike a deal in time to lift the $31.4 trillion debt ceiling. The buck is also gaining popularity following hawkish remarks from Fed officials who hinted at high – to possibly higher – lending rates for longer to quash inflation. The yield on America’s benchmark 10-year government bond touched 3.75%, the highest level in more than two months, a sign of the still-unlocked door for Fed officials to lift borrowing costs. Markets are currently assigning a more than 75% chance that the Fed will pause rate increases in June. But the Fed’s data dependent policy path remains fluid and will look for further direction from U.S. data Friday on inflation and consumer spending.  

Euro flirts with recent bottom

The euro tilted downward and toward last week’s seven-week low against the U.S. dollar after new data from the bloc offered more evidence of moderating economic momentum. The euro zone’s composite purchasing managers index that captures both manufacturing and services activity showed growth slowed more than expected to 53.3 in May from 54.1 in April. Forecasts had called for a slightly smaller decline in activity. The data came on the eve of Germany’s Ifo survey of business optimism whose multimonth streak of improvement is at heightened risk of being snapped.

Chart: Euro starting to feel pain of poor data. Economic data surprises for the Eurozone and US and EUR/USD.

Data knocks sterling to 1-month low

A double shot of disappointing data from Britain knocked sterling to one-month lows against the U.S. dollar. Preliminary data for May on both manufacturing and services activity surprised to the downside, numbers that can lift an otherwise low bar for the Bank of England to raise interest rates for a 12th straight meeting next month. Up more than 2% versus the U.S. dollar so far this year, sterling remains one of the best performing major currencies thanks to the economy’s winter resilience in which the UK avoided recession. The IMF revised up its outlook for UK growth as it no longer expects recession, moving it in line with the Bank of England’s recent forecast. Still, the global lender expects the UK economy to remain in a low gear.

Chart: Investors pare expectations on scale of US rate cuts. Cumulative rate hikes/cuts priced in by December 2023.

USD/CAD climbs to 1-week peak

Canada’s dollar fell to one-week lows amid doubts about whether U.S. lending rates have peaked. Higher oil above $72 helped to slow the loonie’s fall. Some Fed officials remain worried about still elevated U.S. inflation and have backed the case for further rate increases. The greenback has enjoyed a resurgence of late as markets scale back expectations for rate cuts by year-end and entertain the notion of rates potentially rising further. The Fed has said that the road ahead of U.S. monetary policy depends on the strength of coming data, putting the next focus on Friday indicators on inflation and consumer spending.  

Chart: C$ slips to 1-week low. USD/CAD 12 month historical, weekly intervals.

Sterling falls to 1-month low

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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