Global Themes

The U.S. dollar started Fed Week firmer though its coming prospects continued to hinge on the outcome of the central bank’s midweek announcement. The euro slumped to begin the week after weekend talks between Greece and its creditors failed to bear fruit, keeping elevated the risk that Athens could soon go bankrupt and face a potentially chaotic exit from the euro. The value of the euro will continue to serve as a market barometer in Greece securing much needed rescue cash, something it reportedly must do before the end of June when its bailout program is slated to expire. The dollar’s coming prospects meanwhile should hang on what the Fed this week intimates about the road ahead for monetary policy. Dollar sentiment has downshifted a bit over the spring quarter following the U.S. economy’s shift into reverse in the first quarter which clouded forecasts for the Fed to boost interest rates. To get back on a winning track, the dollar would need the Fed to sound hawkish on rates and more upbeat on the economy, scenarios that might be premature at this stage. U.S. manufacturing figures today should help steer the dollar.

USD

Not again. The dollar cut session gains after a key Fed survey showed the Empire State index contracted for the second time in three months, falling to -2 in June from +3.1 in May. That was the weakest reading in more than two years and another sign of how the economy remains rough around the edges after contracting in the first quarter. This week’s main event for the dollar and broader currency markets will be the outcome of the Fed’s two-day meeting on Wednesday with a statement due around 2 p.m. ET, along with the bank’s new forecasts for growth, inflation and unemployment. About 30 minutes later, the Fed chair, Janet Yellen, is due to speak with the media. Any message from the Fed that suggests a September rate hike appears a bit optimistic would leave the dollar vulnerable to a selloff.

CAD

A firmer greenback and oil south of $60 weighed on the loonie which fell to its most affordable level in a week for CAD buyers. Disappointing manufacturing data from both sides of the border largely offset, keeping the loonie in shallow negative territory. Canada’s consumer will be in focus this week with important news Friday on consumer inflation, seen steadying at 0.8 percent, and retail sales, forecast to rise 0.7 percent for a second straight month.

GBP

Sterling hovered around the middle of its recent range against the dollar, with the U.K. currency certain to be impacted by local inflation and jobs data this week, and the outcome of a U.S. central bank meeting. British inflation on Tuesday is forecast to return to positive territory, albeit barely, while unemployment the day after is expected to hold at a seven-year low of 5.5 percent. The decisive factor for the pound this week could be the Fed though. A U.S. central bank seen edging closer to raising rates would tend to make the pound more affordable for GBP buyers since Britain could be a year away from boosting borrowing rates.

EUR

The euro lost ground Monday due to Greece’s inability over the weekend to reach a deal for money with its lenders. The euro continues to serve as a barometer of market confidence in Greece securing the remaining funds from its bailout to keep afloat and avoid a potentially catastrophic exit from the euro over the weeks ahead. The situation remains fluid and uncertain which should keep the euro and broader financial markets subject to heightened volatility.