Market Drivers May 22, 2015

EZ IFO 108.5 vs. 108.3
Draghi – ECB not constrained by zero bound
Nikkei 0.30% Europe -0.28%
Oil $60/bbl
Gold $1211/oz.

Europe and Asia:
CNY LEI 1.1% vs. 0.5%
EUR IFO 108.5 vs. 108.3
GBP PSNB 6B vs. 7B

North America:
USD CPI 8:30

CAD CPI 8:30

CAD Retail Sales 8:30

It’s been a quiet Friday night in the currency market with most major pairs stuck in very narrow ranges as traders wound up their positions at the end of the week.

The euro was slightly higher in the wake of better than expected Ifo data which came in at 108.5 versus 108.2 eyed. The current assessment situation was at 114.3 versus 114 prior but expectations were a tad lower at 103 versus 103.40 the month before.

Overall German businesses were more sober in their expectations of growth prospects, but IFO stuck with its forecast of 0.5% GDP. The latest Flash PMI data however showed a slowdown in both German Manufacturing and Services sectors so it remains to be seen whether this sanguine sentiment will last, but for now traders took the news in stride and pushed the EUR/USD through the 1.1175 level.

At a forum on central banking Mario Draghi noted that the economic outlook for the region is brighter than it has been in seven years and that inflation expectations have recovered from the trough. He also reaffirmed the position staked out earlier in the week by Benoit Coeure that the ECB was not constrained by zero bound, but his comments had no impact on price, as the statement was clearly theoretical rather prescription for immediate policy practice.

The EUR/USD which has corrected significantly over this week is likely to consolidate and trade off anti-dollar flows for the rest of the day. If US CPI data prints cooler than expected the pair could pop above the 1.1200 figure once again as traders bet that any Fed action will be delayed. Inflation expectations are likely to be key in any FOMC deliberations and if the CPI remains near the 0.0% level the committee will be hard pressed to move on rates under such conditions. Indeed Chicago Fed President Charles Evans remarked this week that rates should not be normalized until 2016 given the low inflation readings at the present time. Therefore the CPI data today could have some impact on the market as close up trading for the week.

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