Will Euro Spiral Lower on ECB?

Investors sold euros ahead of the European Central Bank's monetary policy decision on the fear that Mario Draghi will backpedal on his comment about interest rates. Immediately after unleashing a barrage of fresh stimulus measures in March, Draghi said he did not anticipate more rate cuts. In response, investors sent the euro sharply higher as they interpreted his words to mean that the final bazooka was fired. However since March, the ECB head and his counterparts at the central bank have attempted to retract the claim but they were largely ignored. Considering that there has been more improvement than deterioration in the Eurozone economy over the last in 6 weeks, the primary source of the central bank's concerns is the level of the euro. Not only did aggressive easing fail to weaken the currency, but it is now trading 3 cents above its pre-ECB levels and 5 cents from that day's low.

Since the beginning of the month, we've seen EUR/USD shoot up to a 5-month high of 1.1465, pull back to 1.1235 and settle right between those levels. Tomorrow's ECB meeting could drive the currency pair out of this range although the upside would take longer to break than the downside given the proximity of both levels. No easing or tightening is expected but if Draghi spends his time signaling that there could be more rate cuts, the euro will spiral lower onto the 1.11 handle. However if he indicates that they need more time to see how easing affects the economy and leaves it at that, the euro will bounce and aim for 1.1400.

Meanwhile the U.S. dollar traded higher against all of the major currencies today with the exception of CAD. Stronger than expected existing home sales contributed to the move but it was the 6bp increase in 10 year yields and the continued gains in U.S. stocks that drew investors back to the dollar. Investors were also surprised by Fed President Rosengren's hawkish comments. As one of the more dovish voting members of the FOMC, Rosengren typically leans towards slower tightening but last night, he described the U.S. economy as fundamentally sound, said he expects GDP growth to be slightly above potential and suggested the market's outlook for tightening is too pessimistic. In fact he said explicitly that, "the Fed will be raising rates faster than markets think." If even a dove thinks rates will rise sooner, some adjustments need to happen in the dollar.

Sterling traded only slightly lower against the greenback today and while further losses appear likely, its complete disregard for fundamentals is astounding. The U.K. reported fairly weak labor market numbers and investors shrugged off the news, sending GBP/USD sharply higher after a brief and shallow decline. A larger number of people filed for jobless claims in the month of March and more importantly average weekly earnings growth slowed to 1.8% from 2.1% in February. Greater unemployment and slower wage growth is bad news for the U.K. economy and particularly for spending. Retail sales numbers are scheduled for release tomorrow and this slowdown in wage growth combined with the big drop in spending plus shop prices reported by the British Retail Consortium puts the risk to the downside for the report. GBP/USD tested the top of its recent range this past week and the combination of fundamentals and technicals could take the pair to the bottom.

The oil worker strike in Kuwait ended but the rally in oil prices and the Canadian dollar did not. Both loonie and crude continued to press higher, shrugging off fresh highs in oil inventories. Even weaker Canadian data failed to set a bottom in the currency. Wholesale trade dropped more than 2%, the largest decline since 2008. While this number is not closely followed by most market watchers it has an exceptionally strong correlation with the all important retail sales report due on Friday. For the time being, the uptrend in oil and the downtrend in USD/CAD remain intact.

Both the Australian and New Zealand dollars traded lower versus the greenback today. The New Zealand dollar was actually the day's worst performer, falling close to 1% versus the greenback. This decline was driven by a pullback in the PMI services index which reported the slowest pace of growth in 16 months. No major economic reports were released from Australia but tonight New Zealand releases data on consumer confidence and credit card spending. Australia releases its business confidence report. Both currencies are still in a strong uptrend.