ECB "Minutes" Push EURO Towards 1.21

The European Central Bank could be the next major policymaking body that takes a step away from accommodation. According to the "minutes" from their December meeting, the central bank saw "some comfort" in wage dynamics but low inflation remains a concern. Most importantly, they would consider a gradual shift in guidance starting in "early 2018" if reflation continues which suggests that they've grown less dovish since their decision to cut bond purchases in October.  These brief comments sent EUR/USD soaring 100 pips in a matter of hours and shifted the near term outlook for the euro.  The single currency is poised for a move up to 1.21 versus the U.S. dollar and could extend those gains if Friday's U.S. economic reports fall short of expectations.  However looking ahead, the biggest question and the greatest risk for the euro is how much those views reflect the ECB's current sentiment.  There's no question that the region continued to recover over the past month but when the central bank last met, EUR/USD was trading at 1.18 and aiming for 1.21. This 4-cent rally in the currency could undermine the ECB's confidence especially as it coincides with a rise in German yields. Between the December 14th policy meeting and today, 10-year bund yields have risen from 0.3% to .57%. The stronger currency and rising yields is in many ways akin to a rate hike. As market dynamics are very different today than 4 weeks ago, Mario Draghi's eagerness to change their guidance could be diminished as well.  With that in mind, the near term trend for EUR/USD is higher and not lower as all of this is speculation until we actually hear from the Draghi.     

It was another crushing day for the U.S. dollar, which lost value against all of the major currencies. Weaker than expected producer prices and an uptick in jobless claims caused U.S. yields to turn negative and extended the pressure on the greenback. A number of U.S. policymakers spoke today and with the exception of Evans, most of the comments from Bullard and Kaplan were optimistic.  However as non-voting members of the FOMC this year, their comments had limited impact on the markets. Tomorrow will be a big day for the dollar with retail sales and consumer prices scheduled for release. Although the PPI miss and decline in gas prices suggests that consumer prices could fall short of expectations, retail sales could beat with Johnson Redbook reporting stronger spending in December.  Wages also increased at the end of the year, giving consumers the buying power to increase consumption. While 111.00 is likely to be breached before Friday'sreports, how far USD/JPY falls will hinge on their outcome - retail sales should be more important than CPI.

Sterling snapped a 3-day slide to trade higher against the greenback but its gains failed to compare to the move in the euro and as a result EUR/GBP made a move towards its 3-week highs.  With no additional U.K. economic reports scheduled for release this week, we think further gains are likely as investors hope for more optimism from the ECB.

All three of the commodity currencies traded higher against the greenback today with the Australian and New Zealand dollars leading the gains. AUD soared on the back of last night's stronger than expected retail sales report.  Economists had been looking for spending growth to slow to 0.4% from 0.5% but instead, it rose 1.2%, four times more than expected and the largest increase in 4.5 years. Clearly, soft wage growth has not held Australian consumers back but with demand for electrical and electronic products providing a large part of the boost, we are likely to see weaker demand the following month.  Nonetheless, this strong report along with U.S. dollar weakness was enough to drive AUD/USD within pips of a 3 month high and we now think the pair could hit .7950.  The New Zealand dollar rose to its strongest level since September on the back of short covering, risk appetite and U.S. dollar weakness.  The Canadian dollar lagged behind but with oil prices rising another 1%, the U.S. dollar falling and Canadian yields moving upwards, it should be a matter of time before USD/CAD drops below 1.25.