Have Dollar Bulls Regained Control?

It was a great week to be long dollars and to gauge the durability of the dollar's rally, it is important to understand that there was not 1 but 4 main catalysts for the U.S. dollar's recovery this past week - 1) sharp rise & recoupling with Treasury yields 2) softer global data 3) decent retail sales / optimistic Beige Book, 4) lack of fresh geopolitical risks. Investors were relieved that after striking specific targets in Syria, Trump did not escalate tensions further and instead abandoned plans for more sanctions. But it too soon to be optimistic about a change in behavior as Trump turned his attack to OPEC on Friday, calling oil prices artificially high and saying it "will not be accepted."

If President Trump stays relatively quiet, U.S. data beats and 10 year Treasury yields edge closer to 3%, the U.S. dollar can extend its gains. The most important piece of data on the U.S. calendar will be first quarter GDP on Friday. Before that, the calendar is dominated by housing data and a consumer confidence report. Since GDP is not due until the end of the week, Treasury yields should have a greater impact on the dollar's flows. If 10 year rates break 3%, stocks could crash leading to a broad based FX sell-off. Consumer confidence, which is due on Tuesday is likely to hurt more than help the greenback because sentiment will probably be dented by recent headline risks. There's also a Bank of Japan monetary policy announcement but no changes area expected as the Japanese in no rush to exit from their ultra-easy monetary policy.  

Euro is trading lower ahead of next week's European Central Bank's monetary policy announcement. After consolidating for 8 trading days and failing to break above 1.24 throughout that time, the EUR/USD finally broke down on cautious comments from ECB member Weidmann. The head of Germany's Bundesbank said there were recent indications that the first quarter in Germany was "not so brilliant." However on Friday, ECB President Draghi also said growth momentum is expected to continue and their confidence in the inflation outlook increased but the euro-area growth cycle may have peaked. Euro will be the main focus in the week ahead with a central bank rate meeting, Eurozone PMIs, the German IFO report and German labor market numbers scheduled for release. Since the last monetary policy meeting we've seen more deterioration than improvement in the Eurozone's economy. Therefore we don't expect Mario Draghi's outlook to improve materially this month as German sentiment and spending deteriorates. The ECB is not ready to signal the end of QE and they are not thinking about raising interest rates anytime soon. If the PMI and IFO reports, which will be released before the rate decision miss expectations, investors will position for renewed dovishness from the central bank. The risk is to the downside for euro and dovish comments from Draghi could drive EUR/USD to 1.21

Sterling peaked this week on the back of disappointing data and dovish comments from Bank of England Governor Carney. Retail sales, consumer prices, and wage growth all fell short of expectations, prompting the central bank governor to say that while there area some differences in monetary policy views, we'll take them into consideration while being conscious "that there are other meetings over the course of the year." In other words, he's basically telling us that they have plenty of time to raise interest rates and they don't need to do it in May. In response, next month's rate hike expectations dropped from 96% on Monday to 50% by Friday. As the trend of softer data began earlier this month, this pullback in expectations and sterling are not are surprise. Even if the BoE ends up being optimistic, the next meeting is 3 weeks away so further profit taking is likely. For this reason, we expect further losses in GBP/USD with a possible slide down to 1.3850. The only piece of meaningful U.K. data on the calendar is first quarter GDP, which is scheduled for release at the end of next week.

All 3 of the commodity currencies extended their losses on Friday. The latest Canadian economic reports took USD/CAD above 1.27. While retail sales grew 0.4%, excluding autos spending stagnated in the month of February causing the 3 month average to drop to its lowest level since 2015. Consumer price growth also eased to 0.3% from 0.6%. These reports reinforce the Bank of Canada's cautiousness and shows how the economy slowed from the prior month. No economic reports were released from Australia and New Zealand dollar but the strength of the greenback took AUD/USD and NZD/USD close to their monthly lows. For AUD/USD the key level to watch is .7650 - if that breaks the next stop could be .75 cents. The pair could hit this level if consumer price growth falls short of expectations next week. CPI is expected to accelerate year over year but with consumer inflation expectations declining, the risk is to the downside. NZD is also vulnerable if the trade balance falls short, which is possible given the decline in dairy prices in March and weaker manufacturing activity.