Currency Market Analysis
Jul 29, 2015 | Currency Market Analysis
The U.S. dollar and major currencies were mostly stable ahead of today’s important update from the Federal Reserve on the world’s biggest economy and monetary policy. Expectations the Fed this year would finally boost its borrowing rates for the first time in years have helped propel the dollar to multi-year highs. But gains for the dollar recently have proven tougher to sustain since much uncertainty remains over the timing of a rate hike. Dollar bulls are likely to remain a bit apathetic should the Fed stop short of signaling a rate hike as early as its next meeting in mid-September, given headwinds to growth from an uneven recovery and instability in China and Greece. Still, the Fed could sound upbeat and more confident and potentially set the stage for a September increase which could see the dollar make a run at recent highs. The dollar will take cues from the Fed’s 2 p.m. ET statement and U.S. Q2 growth on Thursday.
The euro was steady, keeping within a few pennies of recent three-month lows against the dollar. The euro has managed to hold above recent lows thanks to easing worries about Greek debt and signs of improvement in Germany’s economy, Europe’s most important growth engine. The euro still has to weather the tone of today’s Fed statement. Meaningful gains should continue to elude the euro even if the Fed should signal a later liftoff in December, policies that would still contrast the easier outlook in the euro zone.
Sterling continued to bask in the afterglow of solid growth data this week which allowed it to shrug off lackluster news today on the U.K. consumer. A gauge of retail sales slowed for the second straight month. Nevertheless, expectations the Bank of England is tiptoeing closer to a rate hike gained traction in news that Britain economy grew 0.7 percent in the second quarter, up from a 0.4 percent pace in the first quarter.
Falling commodities and questions about the health of the global economy continued to weigh on the Aussie dollar which notched another six-year low. Year-to-date, the Aussie has dropped more than ten percent in value, offering substantial savings to the Aussie buyer. A less hawkish signal from the Fed today could see the Aussie cut some of its losses.
The loonie treaded water above its weakest level in more than ten years as major currencies steadied ahead of a 2 p.m. ET statement from the Fed today. Weakening oil prices and the perception Canada’s economy may have spent the first half of the year in recession have weighed heavily on the commodity-correlated currency. Monthly growth from Canada looms Friday. If weak, the loonie could test new lows.
For the dollar, it’s all about the Fed. A statement that’s light on clarity and keeps markets guessing on the timing of a rate hike would frustrate the bulls and potentially see the dollar lose a few cents in value. A hawkish message that signals an imminent rate hike as early as September would be bullish for the dollar which could make a run at recent highs. After the Fed, the buck’s next catalyst should come from Q2 growth on Thursday, seen up 2.6 percent annually from -0.2 percent in Q1.
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