Currency Market Analysis

Sep 15, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar treaded sluggishly, mired near multiweek lows, a sign of generally low expectations the Federal Reserve on Thursday would boost interest rates for the first time in years. America’s strengthening economy amounts to a green light for the Fed to lift rates for the first time in nine years. However, outside forces, where China’s economy, the world’s second biggest, has been in steady decline and tumultuous global stock markets, have seen the odds of Fed action this week ebb materially, weighing on the dollar. Markets remain rife with uncertainty and should the Fed surprise with a rate hike it would leave the dollar ripe for a burst out of its recently confined range. Markets will also have lots to digest from the Fed this week with the bank also due to release updated forecasts for the economy and Chair Janet Yellen will speak with the media. Today brings U.S. data on manufacturing and the consumer.


Low market conviction in a U.S. rate hike this week helped the euro keep in striking distance of three-week peaks against the dollar. Consequently, the single currency shrugged off downbeat news on the German investor whose optimism dimmed for a sixth straight month, as the ZEW survey plunged to 12.1 in September, a 10-month low. Europe’s unenviable fundamentals compared to the U.S. loom as longer run negative for the euro.


U.K. inflation ebbed to zero as expected, news that saw a somewhat defiant pound keep near multiweek highs against the dollar. Subdued inflation suggests Britain’s central bank would hold fire on a rate hike for the foreseeable future, a negative for the pound. But the fact that inflation didn’t tip below zero rewarded the pound with moral support. U.K. unemployment and wage data on Wednesday loom as the next catalyst for the pound.


The recently battered Aussie dollar rose to September highs against the greenback, buoyed by somewhat less volatile swings in global stocks and technical factors. The Aussie was little swayed by Australia’s sudden change in premier with Malcolm Turnbull now in charge, beating Tony Abbott.


The loonie drifted higher against the dollar, boosted by modest gains in oil which kept around $44 and markets lightening up on the U.S. dollar ahead of this week’s crucial Fed verdict on interest rates. For the loonie to distance itself from 11-year lows, the Fed would have to come across dovish and signal the case for a U.S. rate hike this year has materially weakened.


The dollar’s sluggish performance of late is a reflection of markets’ lower conviction in the Fed raising interest rates on Thursday. Uncertainty is sky high for the dollar given the big dose of information the Fed will release. In addition to its rate decision, the Fed will also weigh in on where it sees the economy and interest rates headed over the coming year. The dollar would be at risk of a tumble if the Fed should sketch a lower trajectory of rate hikes over the coming year. But don’t rule out the chance of a dollar rally either which could happen if the bank should surprise with a rate hike. Also, Fed chair Janet Yellen will hold a dollar-impacting news conference at 2:30 p.m. ET Thursday, 30 minutes after the bank releases its verdict on rates. Retail sales were largely in line with forecasts, rising 0.2 percent in August, with July getting upgraded a notch to 0.7 percent. The New York Fed’s Empire State index showed scant improvement, moving to -14.7 from -14.9, holding near 2009 lows.

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