The US dollar is rising against all the major currencies today. The Australian dollar is retracing a sufficient part of its recent gains to suggest that the current phase of the US dollar's recovery is not over. Given that the Aussie topped out a week before the other major currencies, it is reasonable that it begins recovering first. Its recent resilience was noted, but that has evaporated today, but a 0.8% drop by early European activity.  

We had noted the divergence between what appeared to a constructive technical condition and interest rate markets that were largely unchanged. The recent price action is providing more interest rate support for the dollar. Specifically, consider the Fed funds futures strip. The August contract can be used to calculate the odds of a June or July rate hike. The implied yield has risen three bp this week. It may not sound like much, but its is the difference between almost 25% and 36% chance.  

The December contract is also interesting. The yield has risen six basis points this week. The implied yield now stands at 58 bp. If the Fed did not raise interest rates until December 14, fair value for the December contract is about 51 bp. The market has moved to discount one 25 bp move and about a third of the another move.  

Look at what is happening to the US-German two-year interest rate differential. Despite that strong US retail sales report and consumer confidence on May 13, the US premium over Germany on two-year money rose a single basis point. However, this week it is already up 10 bp to reach the upper end of the range that has prevailed since late-March.  

The euro has been pushed through last week's lows and appears set to test important support in the $1.1200-$1.1220 area. That area corresponds to last month's lows and a 38.2% retracement of the euro's rally since the early-December upside reversal during the Draghi's press conference. It probably requires a break of $1.12 to convince more participants that a high is in place.