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Currency Market Analysis

Jun 20, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar and its chief peers were broadly flat, waiting on today’s highly-anticipated interest rate decision from the Federal Reserve. The euro and Canadian dollar eased off two-week lows while sterling steadied above a five-month bottom. The Fed renders its big decision at 2 p.m. ET followed by a press conference 30 minutes later by Chairman Powell. Consensus expectations call for the Fed to leave its base rate in a range of 2.25% to 2.50%. No rate cut today, coupled with a lack of a clear signal to ease credit in the very near future would tend to be dollar-positive. However, if the Fed should surprise with a rate cut today and play up downside risks to growth like trade wars, the dollar would risk a knee-jerk move lower. Scope for dollar weakness appears somewhat limited after the ECB this week kicked open the door to lower rate policy.


The euro inched above two-week lows on caution ahead of the Fed’s highly anticipated policy decision. The euro suffered a setback this week after a dovish Mario Draghi, the head of the ECB, voiced renewed concern about the state of Europe’s economy and kicked open the door to stronger stimulus in the months ahead. If the Fed should disappoint a market priced for at least two rate cuts by Christmas, the euro would be at a higher risk of revisiting two-year lows.  


The loonie strengthened after the year’s hottest inflation reading dampened chances of an interest rate cut this year. The 2.4% annual rise in consumer prices in May was the fastest in seven months and topped the Bank of Canada’s 2% target. While gauges of core inflation also exceeded 2%, the BOC’s preferred reading on the economy’s underlying shape, the CPI common, steadied at 1.8%. Consequently, support to the loonie may only prove limited. Next up for Canada: Retail sales on Friday with forecasts of a 0.2% increase in April after a 1.1% rise in March.


A reluctance to stake meaningful bets ahead of the Fed allowed the U.K. pound to steady above its lowest level in more than five months. The big weight on sterling is Boris Johnson who’s leading the Conservative pack to become Britain’s next prime minister. The market senses a higher risk of a disorderly, no-deal Brexit under a Johnson administration. Five candidates remain in the running for Conservative leader and prime minister. The field is expected to narrow to two finalists by the end of the week. An upside risk for sterling would be if dark-horse challenger Rory Stewart, the international development secretary who opposes a hard Brexit, should advance to the final round. 

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