FX: It's All About Inflation Today

Weaker U.S. data is finally catching up to the U.S. dollar. The greenback traded lower against all of the major currencies on Tuesday following softer housing data. Building permits grew 0.3% in the month of April, down from 1.7% in March, while housing starts dropped 9.5%. While housing demand is still very strong, the cost of raw materials like lumber have skyrocketed in recent months. In the 12 months to April, lumber prices rose more than 89%. Between weak job growth, the decline in spending, a slowdown in manufacturing activity in the New York region and now housing, it was only a matter of time before the U.S. dollar sold off across the board as these reports reinforce the Federal Reserves reluctance to respond to rising price pressures. At a time when the global recovery is gaining momentum, the U.S. dollar should underperform.

The euro rose to its strongest level in nearly three months against the U.S. dollar. As we mentioned in yesterdays note, the relaxation of lockdown restrictions across Europe will revive demand for euros. The February swing high of 1.2243 is the closest level of resistance, and we think it will break easily, with EUR/USD making a run for 1.23. GBP/USD also closed in on three-month highs. The job market in the UK is hot, with 84,000 new workers added in the month of February. The claimant count also fell 15,000 and the unemployment rate dipped to 4.8% from 4.9%. Although average earnings growth including bonuses slowed to 4% from 4.5%, excluding bonuses wage growth accelerated.

Inflation will be the main focus for the next 24 hours, with consumer price reports scheduled for release from New Zealand, the UK, the Eurozone and Canada. With the exception of the euro area, where final numbers are anticipated, all countries are expected to report sharply higher price pressures, which could provide near-term boosts for their currencies. In fact, the New Zealand dollar was one of the days best performing currencies. No economic reports were released outside of dairy prices, which fell sharply. An uptick in PPI could renew talk of tightening by the RBNZ, which is already concerned about house prices.

The Canadian dollar rose to its strongest level in six years versus the greenback despite lower oil prices. According to the IVEY PMI report, prices in Canada rose sharply last month. The Bank of Canada was one of the first central banks to taper asset purchases and tomorrows inflation report is widely expected to validate its move.