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Currency Market Analysis

Jun 17, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar showed few signs of topping after the Federal Reserve gave it a new lease on life. The dollar followed up its best day since March 2020 with further gains that pushed it to six-week highs against rivals from Britain and Canada, and its strongest in two months versus the euro. The Fed Wednesday left its low rate policies unchanged but put markets on notice that changes could come sooner than previously expected. The Fed forecast faster growth, higher inflation and penciled in at least two rate hikes by the end of 2023. The biggest takeaway was that the Fed was less confident that higher inflation would prove temporary. Consequently, the Fed has climbed the ranks among the world’s more hawkish central banks, putting the focus on yields whose rise buoys the dollar.

USD

The U.S. dollar stuck near two-month highs despite weaker than expected jobs data. Weekly jobless claims unexpectedly rose in the latest period to 412,000 from the previous week’s pandemic low of 375,000. The data was forecast to improve to 359,000. One report isn’t enough to dent the bullish outlook for the job market, given it was the first wrong turn in over a month. Moreover, the four-week moving average, which smooths out volatility, improved below 400,000, suggesting the strengthening trend remains intact.

GBP

Sterling suffered a Fed-induced contusion that punched it below key psychological support to its lowest level in six weeks. The pound skid as markets scrambled to reprice the outlook for higher U.S. interest rates. With both growth and inflation accelerating across the pond, the Fed tugged forward rate hike expectations and penciled in at least a pair of increases by the end of 2023. Key for sterling will be whether the Bank of England next week sounds dovish like the ECB or takes a page out of the Fed’s hawkish playbook. 

EUR

The euro plunged to two-month lows against the dollar and continued to lick its wounds a day after the Fed somewhat surprisingly donned hawkish feathers. The euro crashed below a key psychological floor, a sign that further losses could follow should U.S. data back the Fed’s bullish outlook. The perception that the Fed will reduce monetary stimulus before the ECB bodes bearishly for EURUSD.

CAD

Canada’s dollar sank to six-week lows as the Fed joined the Bank of Canada as among the world’s more hawkish central banks. The loonie remains the world’s strongest major currencies this year, with USDCAD down 3%. But the loonie’s advantage diminished after the Fed sketched a markedly brighter economic outlook and forecast at least two rate hikes by the end of 2023. The shift in the outlook for North American monetary policy has game changing potential for the greenback. Still, the buck will still need the backing of strong data and higher Treasury yields to embark on a meaningful upturn.


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