Dollar Lifted By ECB Front Loading QE And UK Slipping Into Deflation


The US dollar is broadly higher as yesterday’s gains are extended.  The driving force is not so much a shift in perceptions of the US economy, though the San Francisco Fed that claimed seasonal adjustment quirks are behind the repeated weakness in Q1 GDP helped market sentiment yesterday in North America.  

Rather the euro has been weighed down by comments by ECB’s Coeure indicated that the bond-buying program will be stepped up this month and next month to allow for a slower purchases during the thin summer months. This in turn helped spur a European bond market rally. The German 10-year benchmark yield is off 9 bp to 54 bp, a one-week low. Spain, Italy, and Portuguese yields are off 13-14 bp.

Not only are European bonds rallying, but so are stocks.  Major markets are up 1.3%-2.0%. The Dow Jones Stoxx 600 up 1.5%, led by consumer discretionary and staples, and telecoms.  

The euro had approached $1.15 before the weekend. Today it is flirting with the 100-day moving average near $1.1175. It held above the 20-day moving average that is found near $1.1155.  It has not closed below the 20-day moving average since April 23.  Resistance is now seen in the $1.1280-$1.1300 area. 

The German ZEW was disappointing, but the euro did not make new lows in response.  A softer report was expected, but the decline was more than anticipated by the consensus. The assessment of current conditions fell to 65.7 from 70.2, and the expectations component fell to 41.9 from 53.3. Despite the pullback, both readings remain new cyclical peaks.  

Sterling is lower for third day.  It peaked on May 14 after poking through the $1.58 level briefly. Today it is testing the $1.5540 retracement area of the leg up that began on May 5 below $1.50. The next retracement objective is near $1.5450.   

Sterling was already coming under pressure, but the negative CPI print accelerated the push lower. April consumer prices rose 0.2% on the month, which was half as much as the consensus expected. This was sufficient to push the year-over-year rate into negative territory (-0.1%) for the first time since at least 1960. The core rate also was lower than expected at 0.8%. The consensus was for an unchanged reading of 1.0%. The implied yield of the short-sterling futures strip fell in response.  Next year’s implied yields are off 4-5 bp, and 2017 yields are off 6 bp. UK gilts yields are off 6 bp, among the least in core Europe. The FTSE is also lagging though it is up 0.4% near midday in London.  

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