The US dollar’s pre-weekend pullback was extended in early European turnover but appeared to quickly run out of steam. The prospect of a constructive US employment report at the end of the week, especially given the steady decline in weekly initial jobless claims to new cyclical lows, underscores the likelihood that the Fed hikes rates next week. Bloomberg puts the odds above 90%, while the CME estimates a nearly 80% chance. 

The euro briefly pushed above the highs from late February near $1.0630 (and reached a high of $1.0640) before being sold back below $1.06. There are two main European talking points today.  

First, there is some speculation that the ECB could change its forward guidance this week. It has been saying that rates will remain at present levels or lower “for an extended period of time” beyond the asset purchase program. With headline inflation throughout the area rising, and growth solid, there is some thought that this guidance needs to be modified.  We expected Draghi to forcefully push against this. Core inflation is flat in the trough and surge in inflation is likely to begin unwinding in Q2, and the especially in H2, has last year’s recovery in energy prices fall out of the base effect.   

Second, there were ideas that France’s Fillon would drop out of the presidential contest, and perhaps replaced by Juppe, who would likely shoot into second place behind Le Pen. However, Fillon is trying to hold on, while Juppe made it clear he will not stand.  This encouraged some new euro sales, which pushed the single currency back below $1.06. The $.10585 area is the 38.2% of the euro’s recovery from last week’s dip below $1.05. The 50% retracement is near $1.0565 and the 61.8% retracement is $1.0650.  

The pullback in US Treasury yields, and especially with the 2.50% level holding on a closing basis,weaker Japanese shares, and North Korea’s missile test helped support the Japanese yen.  The dollar was sold to a three-day low near JPY113.55, meeting the 38.2% retracement of gains since JPY11.70 was tested on February 28. The 50-% retracement is near JPY113.25, which corresponds to the 20-day moving average.