Currency Market Analysis

Sep 16, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar drifted higher on the eve of the Federal Reserve’s high stakes interest rate decision, notching 6-day peaks against the euro and a currency basket. Pressure on the buck abated after data Tuesday on the chief driver of the world’s top economy, the consumer, showed strength, keeping alive the risk that the Fed could opt to boost its key rate on Thursday. Still, a slim majority is betting on the Fed to hold off on a rate hike until later this year or early next year, given how overseas weakness has complicated the outlook for the U.S. economy. A rate hike tomorrow, coupled with hawkish comments from the Fed, would tend to be dollar-positive, while no change in rates and a dovish message would leave the dollar at risk of falling. A bigger than expected rise in U.K. pay growth and the fastest in years had the pound off to a fast start. The dollar today will take a cue from data on U.S. consumer inflation.


Never mind the Fed, when will Britain’s central bank raise interest rates? The horizon for the U.K. central bank to boost rates seemingly drew a little closer on news today of the strongest bump in U.K. wages in six years. The 2.9 percent jump in pay growth was the fastest since February 2009. Unemployment, meanwhile, unexpectedly moved to 5.5 percent from 5.6 percent. Still, until U.K. inflation rises meaningfully above zero, Britain’s rate outlook would remain cloudy, which risks doing the same to the pound’s prospects.


A surprise markdown in already low euro zone inflation weighed on the single currency by ratcheting up pressure on the bloc’s central bank to deploy a second round of QE bond-buying stimulus. The final reading of inflation for August came in at 0.1 percent compared to the initial estimate of 0.2 percent, far short of the ECB’s goal of near 2 percent. The bloc’s weak fundamentals loom as daunting negative for the euro, leaving it susceptible to a renewed bout of weakness once worries about global growth abate or when the Fed finally raises interest rates.


Evidence of a Canadian recovery taking shape buoyed the loonie, though pre-Fed caution kept movements to a minimum. Factory sales topped forecasts with a 1.7 percent rise in July while the number for June got upgraded to a 1.5 percent gain from 1.2 percent initially. Signs of a rebounding Canadian economy after spending the first six months of 2015 in a mild recession reduced pressure on the nation’s central bank to cut rates further, boosting the loonie.


Hopes for a Fed rate hike Thursday grew a bit slimmer after another tame reading of U.S. inflation. Core consumer prices rose by 1.8 percent annually in August, a whisker below forecasts of 1.9 percent. With inflation such a key puzzle piece to the Fed’s outlook for interest rates, the dollar squandered some of its session gains while U.S. Treasury yields drifted lower. Another bout of dollar-impacting volatility appeared on the cards for Thursday when the Fed renders its rate verdict. Watch the bank’s updated outlook for the economy and interest rates, and chair Janet Yellen’s news conference.

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