•  USD rallies on prospects the Fed may scale back on bond buying

•  Sterling at a 7-week low with weak British output

•  Antipodean currencies recover from 11 and 6-month lows.

USD – The USD advanced against its major counterparts on speculation the Fed will scale back on asset purchasing program sooner than previously expected. Fed Chairman Ben Bernanke is expected to testify Wednesday on views of the labor market, which may provide clues on when the QE program will end. If Bernanke restates his loose monetary policy stance, the USD could give up some of its gains. In turn the USD may continue to rally if hints of QE unwinding beginning sooner than expected. This week, market participants await the release of new and existing home figures, May’s FOMC minutes, Markit manufacturing PMI, durable goods and weekly initial jobless claims.

EUR – The euro weakened against the USD with the release of weak German Producer Price Index numbers, posting its 3rd straight decline, dropping 0.2%, below the expected -0.1%. Germany is the eurozone’s largest economy and has released a streak of disappointing data last week. The ZEW economic sentiment came in well below estimate, the CPI and WPI reported declines indicating weak economic activity, GDP gained 0.1% but was less than the expected 0.3%. With a host of bad news in the Eurozone, talks of the ECB to cut its deposit rates further remain. 

GBP – The sterling fell to its lowest level in 7 weeks against the USD following weaker than expected UK inflation data. Britain’s inflation rate fell 2.4% in April from 2.8% in March and well below expectations of a 2.6% forecast. The readings were largely affected by the drop in petrol and diesel costs which gives the BoE more ammunition to ease policy in coming months especially when the new chief Mark Carney takes post in July. The pound has lost nearly 7% against the USD since the start of the year but has been recovering from a 2-½ year low in March, but could lose momentum. Investors remain weary on the British economy partly due to its relationship with the recession hit EU, its largest trading partner. On Wednesday, the BoE will be releasing April retail sales and government borrowing numbers along with its most recent minutes of the meeting

JPY – The Japanese yen weakened against the USD after Japanese Economy Minister Akira Amari softened his statement that further losses in the currency will have negative effects. He also stated that he hoped the yen settles at a level justified by fundamentals and at which the impact on imports and exports were balanced and believes that the yen has a little way to correct itself before it’s too weak. The BoJ will be concluding its 2-day meeting on Wednesday with expectations to keep policy unchanged but may adjust its bond-buying plan to limit a recent rise in Japanese yields. Analysts expect the yen to continue its recent weakening while Japanese investors look for higher foreign yields.  

Commodity Currencies – The Canadian dollar weakened against the USD but was little changed from Friday’s close following the Victoria Day holiday on Monday. The CAD remains at a 2-month low with analysts expecting the currency to trade between 1.0250 and 1.0325 in today’s session. Both the New Zealand and the Australian dollar gained ground against the USD mainly on prospects the US Fed will start scaling back on bond buying. Surveys showed inflation expectations in New Zealand eased for the 8th straight quarter to its lowest level in nearly 14 years which points to a a possibility of a rise in interest rates. The antipodeans are both in recovery mode with the aussie pulling from an 11-month low and the kiwi from a 6-month low.

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