USD

The dollar is now this quarter’s worst performing major currency. This is in stark contrast to the euro, the strongest performer, which is up around 4% against the dollar.

Several factors are weighing on the dollar. Investors still believe the US Federal Reserve’s insistence it will not taper its bond-buying operations anytime soon, even if inflation rises above the 2% target. This is denting the dollar’s appeal. Expectations that US growth may be about to peak are also an issue, especially as rebounds in Europe and elsewhere are only just beginning.

Several central banks now appear to be closer to a tightening cycle than the Fed. Take the currencies of New Zealand, Canada and Norway which are all being driven by aggressive central bank expectations.That contrasts with a host of Fed officials who overnight echoed the sentiments of Chair Jerome Powell that a spike in inflation will be transient and ultra-easy policy continue to be warranted.

This Friday’s reading of US core consumer prices will be another test of that sentiment. Confidence of a strong recovery is increasing in the Eurozone and there is now speculation that the European Central Bank (ECB) will start discussing tapering its asset purchase scheme in their June 10th meeting.

 
GBP

The pound was down against the dollar yesterday and fell to its lowest level against the euro in two weeks as a lack of data starved it of direction. It lost around 0.16% against the dollar, despite the American currency’s own woes.

The pound has fallen three quarters of a percent against the euro this week. With a lack of UK data, the market has shifted its attention to the euro and other currencies. It will need the Bank of England (BoE) to bring forward its expectations of an interest rate rise before it can hit those former highs against the euro and dollar. While inflation might be heating up in the UK, BoE Governor Andrew Bailey and some of his colleagues told the Treasury Select Committee on Monday that inflationary pressures will likely be transitory.

The pound had the edge in 2021’s first quarter thanks to the UK’s rapid vaccination program. But now the US and eurozone are catching up, the euro is increasingly well supported.

EUR

The euro was further boosted on Tuesday after data showed the German economy is set for a sharp recovery over the coming months. Germany’s business climate report improved strongly in May to 99.2 after a reading of 96.6 in April.

Key announcements

15:00 – USD – Federal Open Market Committee Member Quarles speaks 
15:30 – Crude Oil Inventories