The U.S. dollar is trading higher against all of the major currencies this morning. Although USD/JPY dropped to a 3 week low intraday the momentum of the sell off was slow and bids came in above 100. The recovery in the pair accelerated after stronger Chicago PMI numbers. Today's economic reports were mixed and this means for the time being, the Fed remains on track to taper asset purchases this year. Their bias will only change when the disappointments start to rack up.

The first set of U.S. today was disappointing. Personal incomes failed to grow in the month of April while personal spending dropped 0.2%, the first decline since May 2012. It may be good behavior for consumers to cut spending when incomes are flat lining but lower consumption is not conducive to growth. The PCE Deflator also declined for the second month in a row, a sign that inflationary pressures remain low. However the dollar recovered when the Chicago PMI index surged to its highest level since March 2012. With manufacturing activity slowing in the NY and Philadelphia regions, investors were bracing for the worse and when the data surprised to the upside, they rallied the dollar in relief. The recovery in the greenback was further support by the upward revision in the University of Michigan's Consumer Confidence index. The preliminary numbers showed that consumer sentiment improved significantly in May but the revision took the index to its highest level since July 2007, or more than 5 years. Once again, this data keeps the Fed on track to cut asset purchase. Uber doves Rosengren, Dudley and Bernanke have made it clear that they feel changes can be made in the next few months.

Meanwhile the big story affecting the euro today were Bank of Italy Governor's comments on the potential for another rate cut. Since Iganzio Visco is also a member of the ECB Governing Council his views are important. However these comments are not new which is part of the reason why the EUR/USD bounced off its lows. Earlier this month Visco said the central bank was "technically prepared" to introduce negative deposit rates. The real question is how many other policymakers feel the same way and based upon recent comments from the central bank, there is a growing consensus favoring additional stimulus especially after the larger than anticipated decline in German retail sales last month. We feel that the ECB is far more willing to signal their intention to lower rates than actually follow through with it. The bar is high for negative deposit rates and they would want to see the PMIs decline again before pulling the trigger.