The U.S. dollar pared some of its recent gains overnight after Greece managed to secure a tranche of short-term funding, effectively taking the risk of an imminent default off of the table. The greenback, which enjoyed strong gains in six of the last seven trading sessions, was hurt by investors’ need to take profits and reassess the market outlook. U.S. data this morning, the first reports of the week, will be closely watched for the latest clues on the state of the world’s largest economy. While concerns that the Fed may be forced to come to the economy’s rescue with additional policy easing later this year could slow the dollar’s gains, its upside should remain largely in-tact as long as uncertainty in Europe continues to mount.
The euro bounced off of a three and a half-month low against the dollar overnight after Europe’s bailout fund, or EFSF, said it would extend Greece a scheduled payment of 4.2 billion euros. The payment should hold Athens over for the next few months and has effectively taken the risk of a messy default in June off of the table. Still, some frustrated euro zone governments withheld some of the scheduled payment on fears that any new government in Greece will try to renegotiate the terms of last year’s bailout. Spanish bond yields moderated after Madrid nationalized financial giant Bankia, a move designed to boost confidence in that nation’s fragile banks. On balance, the euro’s bounce looks like consolidation and a pause in its broader downward trend.
The Bank of England expectedly left its key lending rate unchanged at a record low 0.50% and made no changes to its asset purchase program. The fact that inflation in the U.K. remains stubbornly above the BOE’s 2.0%(y/y) target continues to keep policymakers from providing additional support to the economy. Longer term, the pound could suffer if European headwinds force the BOE to hint that additional easing is becoming more likely.
EUR: The euro bounced off of a three and a half-month low against the greenback overnight after the release of funds to Athens took the risk of Greece’s imminent default off of the table. Europe’s bailout fund, or EFSF, agreed to release 4.2 billion euros in scheduled funding to Athens, allowing the government to avoid bankruptcy as early as June. Separately, Madrid announced that it would nationalize one of Spain’s largest lenders in a bid to shore up confidence in that nation’s fragile banking system. On balance, the market appears to be consolidating and taking some profits off of the table following a week of heavy EUR selling. Going forward, the very elevated risk of political instability in Greece resulting in that nation’s default or even exit from the euro should keep the single currency biased broadly lower. Leaders in Athens continue to struggle to piece together some type of coalition after the weekend elections. A last-ditch effort today by Socialist Party leader Evangelos Venizelos to put together a coalition is not expected to succeed, likely forcing another round of elections in a few weeks. Continued uncertainty remains a major liability for the euro.
GBP: The Bank of England expectedly left its key lending rate unchanged at 0.50% and made no adjustments to its £325 billion asset purchase program. A recent batch of generally solid economic data has reduced the risk of the BOE easing monetary conditions further. Additionally, the fact that consumer inflation in the U.K. remains well above the bank’s 2.0%(y/y) target suggests that officials will have little room for easing even if the economic backdrop fails to improve markedly in the months ahead. However, if European headwinds continue to mount, there is a risk that Britain’s economic outlook, which is closely tied to that of its largest trading partner (the euro zone), could darken and eventually reintroduce the risk of GBP-negative policy easing by the BOE.
AUD: The Australian dollar clawed its way back from over a four-month trough against the greenback overnight after a surprisingly strong employment report for April. Figures showed a 15,500 increase in Australia’s work force, much better than the decline of 5,500 expected. The nation’s unemployment rate dropped to 4.9% from 5.3% in March. While the strong headline number does imply a slightly lower risk of aggressive RBA easing in the months ahead, the risks to the global economy from European instability should ultimately keep the Aussie’s upside very limited.
USD: Weekly jobless claims fell from a revised 368K to 367K last week, in-line with market forecasts. Encouragingly, continued claims, a key measure of longer-term unemployment fell to its lowest since July 2008. America’s trade gap rose from $45.4 billion to $51.8 billion, largely due to increases in the price of oil imports. The dollar was unmoved by the data.