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Euro Slips on ECB Comments, Downside Limited

The U.S. dollar was largely steady in familiar ranges overnight with investors still unwilling to push major pairs too far from recent territory. While the outlook for continued Fed tapering of its monthly bond purchases remains positive for the dollar, the view that monetary officials are in no rush to begin raising borrowings costs continues to limit dollar gains. The dollar was firmer against many of its higher yielding and riskier rivals amid increasing tensions between Russia and Ukraine, just a week after leaders from the U.S., EU, Russia and Ukraine signed a peace accord. Investors await U.S. initial jobless claims and durable goods orders for further direction.

The euro initially slipped on comments from ECB President Mario Draghi, who once again reiterated that low inflation and a strong currency could prompt some form of monetary easing from the central bank. While policymaker comments regarding the low inflation backdrop and the strength of the euro are becoming increasingly pointed, they are having a limited negative impact on the euro. Until the ECB moves closer to backing up its words with actions, the euro is unlikely to fall far from current ranges.

The British pound held near recent highs against the dollar after a much stronger than expected reading of retail sales for April. The data was consistent with other recent improvement in U.K. economic data and underscored the view that the Bank of England will likely lead other major central banks in eventual monetary policy tightening.

The New Zealand dollar initially rose toward a recent three and a half-year peak against the greenback after the Reserve Bank of New Zealand expectedly hiked its key cash rate by another 25 basis points late yesterday and suggested that further lending rate hikes were likely. However the statement by the RBNZ was not as clear an indication of tighter policy from the central bank in the months ahead that some had expected.

EUR: The euro initially slipped following a closely watched speech by ECB President Mario Draghi, who said that the euro’s exchange rate was increasingly becoming a factor in monetary policy decisions. Mr. Draghi reiterated that negative deposit rates or outright asset purchases could be options in addressing the dangerously low inflation backdrop in the 18-member bloc. Still, the fact that officials are unlikely to act until the backdrop deteriorates further continues to keep the euro’s downside limited. Investors await next week’s euro zone CPI for further direction. Another soft reading of CPI next week could push the ECB to act sooner than previously expected and could finally see the euro fall below recent ranges. Overnight, a better than expected reading of German Ifo for April helped the single currency rebound from its session lows.  

GBP: The British pound held near recent highs against the greenback after the Confederation of British Industry’s (CBI) retail sales report came in much higher than expected for March. The report was the latest in a growing list of economic reports that highlight the continued improvement in Britain’s economy and have kept alive expectations for a Bank of England lending rate hike early in 2015. The view that the BOE will likely lead the Fed and the ECB in eventual monetary policy tightening continues to keep the pound elevated and will likely remain supportive until that view changes.  

NZD: The kiwi initially rallied against the greenback and its other major rivals following news that the Reserve Bank of New Zealand expectedly raised its key cash rate by 25 basis points to 3.00%, its second quarter-point rate hike this year. The RBNZ said that future policy tightening was likely, depending on the inflation backdrop and on the value of the New Zealand dollar. The RBNZ however noted lower than expected prices for dairy products, New Zealand’s largest export. Lower demand and prices for dairy could dampen expectations for future RBNZ rate hikes. The kiwi pared overnight gains ahead of the North American market open.

USD: The dollar initially rose on news that durable goods orders rose by 2.6%(m/m) in March, well above the expected 2.0%(m/m). Ex-transports, durable goods rose by 2.0%(m/m), eclipsing forecasts for a 0.6%(m/m) rise. A key gauge of business spending was also sharply higher last month, all of which generally confirm expectations that warmer weather is helping the world’s largest economy recover. Initial jobless claims inched higher to 329,000 from a revised 305,000, worse than the 310,000 expected. Investors are also keeping a close eye on escalating tensions between Russia and Ukraine just a week after a peace accord was signed in Geneva. A rise in tensions would benefit the dollar against its higher yielding rivals but likely see it lose ground against the Japanese yen.