The dollar extended its gains versus the euro and yen on Wednesday, but struggled to carry over that strength against the sterling and Aussie. US economic data released earlier today propped the greenback up near the 1.56-level against the euro and 105.29 versus the yen. Durable goods orders for April surprised to the upside, with the headline figure posting a 0.5% decline and beating calls for a drop of 1% versus a 0.3% decline in March. The excluding transportation orders surged by 2.5% compared with forecasts for a 0.5% decline and up from 0.9% the previous month.

The US economic calendar for Thursday consists of Q1 GDP, core PCE and weekly jobless claims. The Q1 GDP reading is expected to improve to 0.9% from 0.6%, while the GDP deflator is seen unchanged at 2.6%. Core PCE prices are also expected to hold steady at 2.2%. Weekly jobless claims are seen creeping back up to 370k from 365k a week earlier.

Minneapolis Fed President Gary Stern offered a downbeat assessment of the economy, saying the current downturn in housing appears more severe than in the early 90s. Stern said that US economic growth will likely be modest in the near-term and expects unemployment to rise somewhat. He said that overall inflation growth is clearly too rapid and attributed the increase to food and energy costs. Further, Stern tried to dissuade the assertion that energy prices and the dollar were linked.

Euro Slips to 1.56

The euro retreated against the greenback toward the 1.56-level on the heels of the stronger-than-forecast readings for durable goods orders. Germanys import prices were higher than expected, up 0.9% m/m and 5.7% y/y. Consumer prices also edged higher in Germany, with May CPI rising to 0.6% versus a 0.2% decline a month earlier and 3.0% compared with 2.4% a year earlier. The HICP readings were also stronger than expected at 0.6% m/m and 3.0% y/y. Meanwhile, the March Eurozone current account balance posted a 15.3 billion euro deficit compared with a 4.3 billion euro surplus in February.

Traders will shift their focus to Germanys labor report, scheduled for release overnight. The May unemployment rate is expected to ease to 7.8% from 7.9%, while the unemployment change is forecast at -20k from -7k in April. With the German economy showing more resilience, the ECB has more flexibility to focus on curbing inflationary pressure in the economy and will likely maintain its hawkish bias for the remainder of the year.