USD - The USD diverged from its recent trends overnight, but nonetheless strengthened further against many of its major counterparts. Despite ongoing fears that the Eurozone is descending into further political and economic turmoil, risk sentiment is slightly improved this morning after several encouraging economic reports out of the US. The much anticipated monthly reading of CPI showed that inflationary pressures are in line with expectations at +2.3% on an annualized basis. While this is sharply lower than last month's reading of +2.7%, after soft readings of both import and producer prices last week, many investors anticipated a below forecast reading of consumer prices. In a knee-jerk reaction, this eases some speculation that the Fed will soon unveil a third round of quantitative easing, but with inflation easing further stimulus measures cannot be written off just yet. Meanwhile, retail sales came in as expected at +0.1% versus last month's +0.7% and Empire manufacturing bested even the most optimistic forecast at 17.09 versus 6.56 in the previous reading. With the prospects of immediate Fed action at least being delayed several months, the USD appears set for further gains against many of its peers as the primary benefactor of safe-haven capital flows.

EUR - The euro extended its recent losses this morning after initially plateauing overnight. The dramatic push lower comes after Greek policymakers said negotiations to form a coalition government have collapsed and that new elections will be held next month. The dour news more than offset a better-than-expected reading of German GDP, which suggested that the Eurozone economy may avoid recession after all. While eight Eurozone members are currently contracting, resilient German economic growth was good enough to keep the bloc out of recession with annualized GDP registering 0.0%. The failure in Greece is not completely unexpected, but there had been rising hope that a deal would be struck in the eleventh hour. As such, fears of contagion are again on the rise as bond yields push higher in both Italy and Spain. The yield on the Spanish 10-Yr is back over 6%, prompting concerns that the region's fourth largest economy may soon require external assistance, but the current mechanisms in place likely could provide sufficient funding.

GBP - Sterling is mixed this morning, falling against the USD while extending its recent gains against the EUR. The pound's rise versus its mainland European counterpart were initially slowed as the better-than-expected reading of German GDP sapped demand for the safety of British government assets. However, Greece's failure to form a government has re-sparked the safe-haven inflows. Meanwhile, investors are widely anticipating BoE Governor Mervyn King's economic forecast and explanation of the Bank's recent inaction at a speech due tomorrow. King must be careful to not spark further gains in the currency, which in turn would put immense pressure on the already weak British economy and undo any benefits from the recent rounds of easing. While QE failed to foster strong economic growth over the past two years, it now appears policymakers have chosen to focus on taming inflation, which has remained over the Bank's target threshold for the same period of time.

JPY - The yen diverged overnight, gaining against the EUR while weakening against the USD. The modest fall against the dollar does alleviate some pressure on policymakers to add more stimulus measures, but persistent deflation and the yen's 5% rise against the USD since March may prompt authorities into action. Japanese GDP is expected to register 3.5% month over month later this week, but the healthy pace of growth will likely soon slow as reconstruction from last year's natural disasters fades. Nevertheless, demand for the yen remains high as investors seek its relative stability in light of the ongoing political and economic tensions in Europe.

Commodity Currencies - The commodity-linked currencies are range-bound this morning, albeit towards the lower end of their annual ranges. Raw good prices are generally lower with oil down to $94/bbl, gold at $1553/oz, and copper extending its decline to $350/lb. The CAD is little changed from yesterday's close after trading through a particularly volatile overnight session. The loonie initially rose after the encouraging economic data out of the US was released, but quickly retraced those gains as Greece's failure to form a government weighed on risk appetite. Similarly, the MXN pared early gains, reaching a fresh four-month low against the USD on waning demand for riskier assets. Despite the risk-off mentality, the AUD pared some of its recent losses as investors suspect that the recent precipitous drop in the Aussie is likely overdone. However, the longer-term outlook for the AUD remains dim as the slowdown in the Chinese economy is prompting investors to sell Australian assets in anticipation of further Aussie depreciation.