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- Euro Up on Improved Sentiment. British Pound Gains Ahead of BOE Minutes, UK Jobless Claims
- Australian Dollar, New Zealand Dollar Rally 3% vs. Japanese Yen - AUD/USD to Face Australian CPI Overnight
- Canadian Dollar Sees Choppy Price Action as Bank of Canada Unexpectedly Cuts Rates
US Dollar, Japanese Yen Experience Sharp Declines, But Upside Potential Remains
The US dollar and Japanese yen experienced deep retracements on Tuesday after the currencies rallied across the majors on Monday. The culprit? A broad revival in risk appetite. However, as we mentioned yesterday, there is substantial uncertainty about the health of the financial markets as the US government performs stress-tests on the 19 biggest US financial institutions, and until the results are announced on May 4, there is still potential for risk aversion to weigh heavily, and thus, there's still upside potential for the US dollar and Japanese yen. In fact, the DXY index remains very much within an uptrend, while many of the Japanese yen crosses still remain down from majors resistance levels. Adding to evidence of this, DailyFX Quantitative Strategist David Rodriguez pointed out that risk sentiment may have hit a turning point.
Euro Up on Improved Sentiment. British Pound Gains Ahead of BOE Minutes, UK Jobless Claims
The euro made some headway against the US dollar on Monday, as German investor confidence in the economic outlook improved more than expected in April. Indeed, the ZEW index jumped into positive territory for the first time in nearly two-years to 13.0 from -3.5 as equity markets around the world rallied. On the other hand, sentiment on current conditions remained extremely pessimistic as this component fell to a more than five-year low of -91.6 from -89.4.
Likewise, the British pound held up well on Tuesday, gaining against every currency except the Australian dollar and New Zealand dollar. Looking to GBP/USD, the pair recovered from the 38.2 percent fib of 1.3655-1.5070 at 1.4532 and ended the day below immediate resistance at 1.4700. The gains came despite the fact that the UK retail price index (RPI) fell 0.4 percent in March from a year ago, marking the first contraction since 1960. Meanwhile, the consumer price index (CPI), which ignores some housing costs, local taxes, and mortgage interest, eased to an annualized pace of 2.9 percent in March from 3.2 percent, putting the measure back into the Bank of England's 1 percent - 3 percent preferred range.
Wednesday morning could prove to be another tumultuous time for the British pound, as two key UK releases will both hit the wires at 4:30 ET. The minutes from the BOE's April 9 meeting may not be as market-moving as they've been in the past, as their post-meeting press release was simple and straightforward, noting that they voted to leave the Bank Rate at 0.5 percent, that the Committee voted to continue with their 75 billion pound quantitative easing (QE) program, and that the program would ultimately take another two months to complete. That said, indications that the BOE may need to expand their QE program could weigh heavily on the British pound. At the same time, UK jobless claims are forecasted to have surged by 116,000 during the month of March after rising a record 138,400 in February. This would mark not only the fourteenth straight month that claims for unemployment benefits increased, but it would also push the claimant count rate up to an 11-year high of 4.6 percent from 4.3 percent. With job losses accelerating, the UK's recession is unlikely to bottom out anytime soon and thus, disappointing results could lead to a sharp GBP/USD pullback. On the other hand, better-than-anticipated figures could provide a boost to the currency.
Related Article: Euro/US Dollar Loses Correlation to S&P 500 - Time for Turn Lower
Australian Dollar, New Zealand Dollar Rally 3% vs. Japanese Yen - AUD/USD to Face Australian CPI Overnight
The Australian dollar was easily the strongest of the majors, and the New Zealand dollar was close behind, as the high-yielders ended the day up more than 3 percent against the Japanese yen and over 2 percent versus the US dollar. The Aussie could see a shake-up overnight as Australia's headline consumer price index is forecasted to have risen 0.5 percent during Q1, bringing the annual rate down to a more than one-year low of 2.8 percent from 3.7 percent. However, after the Reserve Bank of Australia surprisingly cut their cash rate target by 25 basis points to 3.00 percent, RBA Governor Glenn Stevens said that inflation over the medium term is likely to be lower than it has been over the past two years, suggesting these Q1 results could actually reflect a much more significant slowdown in price growth. Furthermore, Sunday's release of Australian producer prices unexpectedly fell 0.4 percent in Q1, suggesting headline consumer price growth could follow suit.
That said, Stevens' last policy statement also indicated that the RBA may leave rates unchanged going forward as the current stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead. Nevertheless, if we start to see consumer price growth fall below the RBA's 2 - 3 percent target range, the news could weigh on the Australian dollar. However, if inflation pressures prove to be stronger than anticipated, the currency could actually rise.
Canadian Dollar Sees Choppy Price Action as Bank of Canada Unexpectedly Cuts Rates
The Canadian dollar pulled back sharply across the majors this morning, sending USD/CAD toward 1.25, after the Bank of Canada unexpectedly cut rates by 25 basis points to an all-time low of 0.25 percent. The Bank also said that they would commit to leave rates at 0.25 percent through the end of June 2010, though this was conditional on the inflation outlook. There had been some evidence that the Bank could reduce rates today, as Credit Suisse index swaps were pricing in a 50 percent chance of such a move. Nevertheless, the swift plunge in the Canadian dollar upon the announcement indicates that for the most part, the decision was unexpected. By the end of the day, though, broad weakness in the US dollar and increased risk appetite drove USD/CAD back down toward Monday's closing levels.
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Written by: Terri Belkas, Currency Strategist for DailyFX.com