Currency Market Analysis

Jul 15, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar and its main rivals were mostly steady ahead of an eventful day for markets. A busy day ahead could quickly snap currencies into action though with Fed Chair Janet Yellen due to speak before U.S. lawmakers, key testimony that could shed light on the road ahead for monetary policy. The generally improving U.S. economy has the Fed on track to raise interest rates by the end of the year, a key positive for the dollar. Ms. Yellen is due to speak at 10 a.m. EDT, the same time Canada’s central bank is expected to deliver an important policy announcement. Canada’s loonie held close to four-month lows, a reflection of how markets see an elevated chance that the Bank of Canada (BOC) may soon decide to slash interest rates from 0.75 percent with oil in a renewed slump and the economy producing a subpar string of data. Sterling held firm, supported by upbeat news on U.K. wage growth.


A sudden turn for the bullish had the U.K. pound on the rise, clocking two-week peaks against the dollar. An acknowledgment this week by the Bank of England (BOE) that the time was edging closer for a rate hike buoyed the pound, hawkish talk that was reinforced by a 3.2 percent rise in U.K. wage growth in May, the biggest bump in five years. The jobs news was mixed though as unemployment rose for the first time in two years to 5.6 percent.


The yen weakened after the Bank of Japan (BOJ) kept its main rate near zero, as expected, but marked down its outlook for the Japanese economy, keeping intact views Japan may need to step up stimulus at a time the Fed is leaning toward a rate hike, a favorable outlook for dollar-yen.


The Aussie dollar enjoyed a short-lived bounce after news from China depicted a surprisingly resilient economy. China’s economy grew 7 percent in the second quarter, better than forecasts of 6.9 percent. The Aussie’s failure to find much support highlighted how underlying sentiment remains poor.


The euro steadied as few took to staking big bets ahead of a Greek vote on the nation’s new rescue loan and the U.S. Fed chair’s mid-year economic update to congressional lawmakers. Greek’s parliament was due to render its decision on whether the nation should accept another severe dose of austerity in exchange for €85 billion in rescue loans. Next up for the euro will be a European Central Bank (ECB) meeting on Thursday; a key event that should impact the euro.


The loonie held close to four-month lows ahead of today’s 10 a.m. ET policy decision by the Bank of Canada. A slim majority expect the bank to keep its key rate unchanged at 0.75 percent. However, a cut today to 0.50 percent wouldn’t come as a total shock with oil, a key Canadian export, in a renewed slump and the Canadian economy producing a string of subpar readings. After today the BOC next meets on Sept. 9.


Good news on the U.S. economy helped the dollar higher as it added to expectations the Fed would lift rates this year. The Empire State index improved more than expected to 3.9 in July from -2 in June. Wholesale inflation rose 0.4 percent in June, twice forecasts of 0.2 percent, a sign that inflation is headed in the right direction which would help the case for higher U.S. interest rates.

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