Currencies: Dollar claws back gains, as euro weakens after Draghi comments

The U.S. dollar retraced some losses achieved after Wednesday data, but remained in a rather close trading range, versus its rivals. Meanwhile, the euro was in focus after European Central Bank President Mario Draghi said the central bank is still concerned with subdued inflation in the eurozone.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.18%  was up 0.2% to 89.822, slicing into Tuesday’s pullback of 0.3%, according to FactSet data. Tuesday’s loss was the index’s third in a row.

The WSJ U.S. Dollar Index BUXX, +0.03% which is a measure of the buck against a broader basket of rivals, was little changed at 83.57.

The euro EURUSD, -0.2825% traded at $1.2362, down from $1.2392 in the previous session. The British pound GBPUSD, -0.0286% on the other hand, edged up to $1.3969 from $1.3962 on Tuesday.

The greenback edged lower against Japan’s yen USDJPY, -0.11% buying ¥106.48 compared with ¥106.58 late Tuesday in New York.

Against the Canadian dollar USDCAD, -0.0848% the buck moderated following Tuesday’s rally that was inspired by dovish comments from Bank of Canada Gov. Stephen Poloz. One U.S. dollar last bought C$1.2943, compared with C$1.2966 late Tuesday.

What is driving the market?

The U.S. Dollar dipped into negative territory after economic data showed that retail sales contracted for a third straight month in February, but retraced their losses promptly and returned to modest gains.

On Tuesday, the dollar was rattled by data and headlines, as February consumer-price inflation data came in as expected, disappointing market participants who had hoped for more upside and somewhat dampening expectations for the Federal Reserve to raise interest rates four times this year instead of three as still widely anticipated. Shortly after the inflation report, news that U.S. Secretary of State Rex Tillerson was fired and would be replaced by CIA Director Mike Pompeo broke.

Read: Twin deficit is not the whole story behind dollar weakness, according to Pimco

Elsewhere, the euro spent much of the early Wednesday trading in the red, after ECB head Draghi said at conference in Germany that he and his colleagues needed to see “a sustained adjustment in the path of inflation” toward its target of near but just below 2% before the bank stops its asset-purchase program.

The “performance of underlying inflation remains subdued compared with previous recoveries,” he told the conference attendees. “The key issues we need to examine are wage dynamics, their pass-through to prices, and the possible risks to the inflation outlook,” Draghi said.

The ECB last week dropped a longstanding pledge to boost the size of its 30 billion euro a month asset-buying program if the outlook for the eurozone deteriorated. His comments Wednesday on soft underlying inflation also suggested the ECB isn’t likely to raise interest rates in the foreseeable future.

Plus: Inflation is rattling markets—here’s what you should know about consumer prices

What are strategists saying?

“Although Mr. Draghi noted that inflation was on the right track, uncertainties still remained,” said Boris Schlossberg, managing director of FX strategy, in an note. “And while ECB officials are not considering any overt intervention measures, the form of soft jawboning is clearly an attempt to slow down the rise of the euro and keep it below the $1.2500 mark,” he said.

“By all measures, the euro should be lower as interest rate differentials between U.S. and Europe continue to expand, but chaotic White House policy, muted inflation data and so far sub-par growth in 2018 has cast doubt on the ability of the Fed to follow through with its hawkish talk,” Schlossberg added.

What are the data?

Retail sales continued to contract in February, hitting their third subsequent month of decline and falling 0.1% versus MarketWatch consensus estimate of a 0.4% gain. Excluding cars, retail sales grew by 0.2%, also underperforming a 0.4% expectation.

The producer-price index measuring wholesale inflation for the same month rose to 0.2%, beating forecasts of 0.1%.

Data on January business inventories is due at 10 a.m. Eastern.

See: MarketWatch’s Economic Calendar

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