•  Euros falls to a 6-week low due to a contraction in GDP

•  Sterling strengthens after the release of the Quarterly Inflation Report by the BoE

•  USD climbs despite mixed US data output

EUR – The euro fell to a 6-week low against the USD, hurt by an unexpectedly large contraction of the euro zone economy. France, which is the 2nd largest economy in the eurozone reported Q1 GDP came in weaker than expected at -0.2% compared to the -0.1% that was expected. Italy, the eurozone’s 3rd largest economy, reported its 7th consecutive quarterly decline, the longest since records began in 1970. Germany, the largest economy in Europe grew by just 0.1% in Q1, which was weaker than forecasted. Overall eurozone Q1 GDP contracted 0.2%, worse than the forecasted 0.1%. The risk of this continuing contraction may pressure the ECB to ease monetary policy further and even take the deposit rate below zero. This will make euro holdings unattractive and could lead to a broad selloff.

GBP – The sterling strengthened for the first time in a week and recovered from a 6-week low following the BoE’s release of the quarterly inflation report. Governor Mervyn King, who suggested that a negative interest rate might be an option in the future, presented the report and stated that this was the first time he had announced a brighter economic outlook since the financial crisis began. Annual inflation, currently at 2.8% is on its way to the 2.0% target in 2 years’ time, lower than the forecasted 2.3% issued in February. In addition, UK unemployment claims fell by 7,300 in April compared to the forecasted 3,000 from March, hitting its lowest since April 2011 to 4.5%. King, who has presented the BoE’s quarterly inflation report every 3 months since 1993, will be turning the reins over to Mark Carney in just over 6 weeks. Analysts said that the pound was likely to be capped by concerns that Carney may take more monetary policy measures to boost the economy.

JPY – The yen weakened against the USD following soft US data and a spike in Japanese government bond yields.  The BoJ announced it will pump a massive amount of cash in the Tokyo money market after its offer to inject 2.8 trillion yen last Friday. PM Abe urged the BoJ to bring order to the highly volatile JGB market as worries that yield rises could get out of control. Last Friday’s offer for QE, have sent Tokyo shares surging to a 5 ½-year high and the yen to a 4 ½-year low. The 10-year bond yield had surged 28 basis points since Friday, which was the biggest 4 day spike since August 2003. BoJ Governor Kuroda said that a weaker yen can contribute to ending deflation by boosting import prices but the main goal is to aim for a balanced inflation which includes rising inflation as well as economic demand.

Commodity Currencies – The Canadian dollar weakened against a surging US dollar following a slowdown in Canadian manufacturing sales in March driven by lower prices for energy products. The New Zealand and the Australian dollars remains pressured with sharp falls on commodities and expectations regarding China/US growth prospects.  Also weighing on the Antipodeans is the resurgent in the US dollar and the unwinding of speculative long positions.