The US dollar started Thursday's North American session narrowly mixed while Sterling, the Australian dollar and Swiss franc enjoyed small gains. Meanwhile, the Scandis, New Zealand dollar and euro nursed small losses.
The main talking point is the improved signals from the US and more cautious tone from Europe. In the US, there is talk of a compromise on health-care reform a week after the bill was pulled to avoid defeat. In some ways, the issue comes down to whether a compromise can be reached between the Freedom Caucus, a conservative group within the Republican Party, and the Tuesday Group of more moderate Republicans. At the same time, there is continued effort to move on to tax reform and there are some reports suggesting the infrastructure initiative could be brought forward into this year instead of 2018.
Also, signals from the Trump Administration suggest moderating views on NAFTA reform (the peso has responded favorably), and that the US reluctance under Obama to regard China as a market economy (for WTO purposes) may be reconsidered. If that happens, it would lend credence to the argument that Trump's remarks on the matter are, to a great extent, more bark than bite.
Separately, at least three regional Fed Presidents -- Rosengren, Williams and Evans -- seemed to suggest upside risks to the Fed's take on the economy. To be sure, the Fed's leadership -- Yellen, Fischer and Dudley -- is more cautious, but even the two hikes that Fischer confirmed were likely over the remainder of the year are not fully discounted. The market has serious doubts. According to Bloomberg, there's about 45% of a chance of one more hike. The probability that Fed funds target range sits at 1.25%-1.50% at the end of this year is about one in three.
In Europe, there has been a push against the hawkishness that had begun creeping into the market, encouraged by some official talk. The softer inflation numbers from Spain and Germany ahead of Friday's flash reading for the eurozone as a whole helped underscore the less-hawkish signal from the ECB. Spain's CPI fell to 2.3% from 3.0%. German inflation fell to 1.5% from 2.2%. Even if the base effect from last year's early Easter played a role in the decline in these inflation readings, the point Draghi and Praet make is that eurozone inflation is still not on a convincing path higher. Core inflation bottomed at 0.6% and may have slipped back to 0.8% in March form 0.9% in February.
The euro traded lower for the third consecutive session. It closed on $1.0730 after having traded a little above $1.09 on Monday. There are several technical targets in the $1.0710-$1.0720. A convincing break seems unlikely now but if it does yield, the $1.06 area would be the next target.
The US 10-year yield is struggling to breach 2.40% while USD is struggling to get past JPY 111.00. The high for the week was set earlier Thursday, just below JPY 111.50.
Sterling dipped briefly below $1.24 on Wednesday and is holding above that point. A move above $1.25 is needed to lift the tone. It seems too early to put much importance in the initial Brexit banter between the UK and EU. Although Prime Minister May has rejected the "hard" and "soft" exit verbage, that does not change the fact that the EU is going to drive a very difficult negotiation in which it is difficult to envision a way for the UK to maintain access to a single market without significant concessions on the freedom of movement.