Behind the U-Turn in EURO

Just as we feared, hawkish Federal Reserve meeting minutes failed to give the dollar the swift kick upwards that bulls had been desperately waiting for.  The dollar ticked up briefly after the minutes were released but gave up its gains quickly despite U.S. policymakers seeing the need for a hike "fairly soon" if the economy remains on track.  Although many Fed voters saw only modest risk of significant inflation, the overall tone of the FOMC statement was positive with several Fed officials seeing a high risk of unemployment overshoot.  The minutes from the last FOMC meeting confirms that a rate hike is on the way and as March.  Yet the dollar received no help from this report and instead of rising, fell quickly and aggressively which is surprising considering that Fed officials continue to talk up tightening. We heard from FOMC voter Powell today who said the median forecast of 3 hikes in 2017 is a plausible outcome.  With that in mind, the greenback managed to recover some of those losses before the end of the NY session.  We continue to look for the dollar to trade higher on positive data and the growing prospect of tightening next month.

Meanwhile euro U-turned today after Francois Bayou pulled out of the French Presidential race, boosting Emmanuel Macron's chance of beating Marine Le Pen.  The single currency traded as low as 1.0493 versus the U.S. dollar before shooting back up to 1.0560 in less than 2 hours.  Politics continues to overshadow economics as investors shrugged off the stronger German IFO report.  French elections are in focus - the first round of voting will be on April 23rd with the final vote set for May 7th.  Recent polls show Le Pen in the lead even in a race without Bayou but Bayou is proposing an alliance with Macron and investors are hopeful that this would reduce Le Pen's chance of victory. Scandal laden Filion is still ahead of Macron so at the end of the day, we're not sure how much difference a Macron-Bayou alliance would make.  Le Pen's popularity rose after riots over an alleged police rape spread across the suburbs of France.  Her anti-government / terrorism / immigration / EU views are gaining traction but major news agencies are describing a victory by this far-right candidate as the next major political earthquake. It would usher a new wave of protectionism in the Eurozone's second largest economy that could threaten the very fabric of the Eurozone community.  For these reasons, we believe gains in EUR/USD will be short-lived. Revisions to Germany's fourth quarter GDP report is scheduled for release tomorrow.

Sterling traded slightly lower against the greenback today as it continued to consolidate within a narrow range.  GDP for the U.K. GDP was revised up for the fourth quarter, but a downward revision in the annualized pace of growth offset the positive quarterly adjustment. Exports took a big jump seeing a 4.1% increase in activity when only a 2.0% increase was expected. However, this data was partially dragged down by a decline in business investments of 1.0% for the fourth quarter versus a 0.1% forecast. With no market moving U.K. data due for release tomorrow expect sterling to take its cue from the other majors. 

The commodity currencies ended as a mixed bag with Canadian dollar trading lower and the Australian and New Zealand dollars trading higher. CAD underperformed on the back of softer data - Canadian retail sales dropped by 0.5% in the month of December, slightly worse than the 0.0% number forecasted. Oil compounded the problems for the Loonie as it gave back some of its gains from yesterday falling nearly 1%. In New Zealand credit card spending rose 0.2% in January but showed a decline when compared to the prior month's 3.2% read. No economic reports were released from Australia but the recent optimism from the RBA has kept the currency bid.