Currency Market Analysis

Jul 14, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar steadied after strong gains of more than 1 percent against the euro on Monday. Greece’s agreeing on a preliminary deal for more funding with its creditors seemingly fastened a lid on the nation’s debt woes, allowing market attention to return to fundamental drivers. Global fundamentals, meanwhile, have long been a source of strength for the dollar, with America’s improving economy keeping the Federal Reserve on track to lift interest rates in the months ahead. In Europe, with inflation too low and unemployment too high, the European Central Bank has vowed to keep in place strong stimulus measures that anchor interest rates and subtract from the euro’s appeal. After a strong day of gains Monday, the dollar steadied on caution ahead of key news today on the American consumer, the main engine that powers the world’s biggest economy. Others choose to pull a few profits off the table ahead of key testimony this week on Capitol Hill by Fed chair Janet Yellen. Sterling shrugged off slower inflation and instead got a boost from hawkish remarks from the governor of the Bank of England (BOE). Canada’s dollar flirted with four-month lows as oil fell further.


After hopping above C$1.28 earlier Tuesday to its weakness in nearly four months, the loonie caught a break in surprisingly weak news on the U.S. consumer that suggested America’s second quarter recovery from a first quarter fall may not be a solid. The loonie remains on a weaker footing though with the pace of the oil decline gaining speed in the wake of Iran’s nuclear deal with other nations.


The euro steadied after shedding a whopping 1.5 percent in value against the dollar on Monday. Greece’s preliminary deal on fresh funding with its lenders seemingly contained the nation’s long festering debt crisis, for now. The agreement though has a way to go yet before it becomes official. Greek lawmakers have to pass it into law, with implementation of the deal posing another potential risk. A market focus now on more fundamental drivers opens the door to a weaker euro since its central bank is expected to trail America’s and others in boosting interest rates which would leave the euro at a distinct disadvantage. Germany’s influential ZEW survey of investor morale darkened for a fourth straight month to 29.7 in July from 31.5, not as bad as forecasts of 29.0.


The dollar slipped anew after data showed American consumers unexpectedly turned fragile last month, clouding forecasts for a solid second quarter rebound. Retail sales surprisingly fell 0.3 percent in June compared to forecasts of a 0.2 percent gain. The dollar looks ripe for a bout of weakness on profit-taking in the wake of the disappointing data and on the eve of the Fed chair’s testimony tomorrow and Thursday on Capitol Hill.


Sterling caught a break in hawkish remarks from BOE Gov. Mark Carney who played down low inflation and stirred anew the U.K. interest rate debate, saying the time was “moving closer” for Britain to raise borrowing costs with the economy on an improving path. Key to Britain’s rate outlook will be U.K. data Wednesday on the job market. Forecasts call for unemployment to hold at 5.5 percent, a seven-year low, while paycheck growth is expected to rise. As expected, U.K. inflation today slowed to zero in June from 0.1 percent in May, moving further away from the BOE’s goal of 2 percent. Mr. Carney’s hawkish remarks on rates would need the backing of better data on the job market to lend a meaningful boost to the pound.


With global uncertainty seemingly waning in the wake of Greece’s bailout agreement, the safer yen has fallen out of favor, with the Japanese currency flirting with two-week lows against the U.S. dollar. Markets though are keeping a wary eye on China whose volatile stock market fell more than 1 percent on Tuesday after three consecutive days of strong gains. Lingering uncertainty over weakness in China should help to slow the yen’s fall.

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