Currency Market Analysis

Oct 22, 2015 | Currency Market Analysis

Global Themes

The broadly weighted U.S. dollar index hovered near two-week peaks, boosted by dovish expectations for the European Central Bank (ECB) today. As expected, the ECB left its base rate at record lows near zero. The real action looked set to get underway after the ECB president starts his postmeeting news conference at 8:30 a.m. ET. With inflation back below zero, and the 19-nation economy facing stiffer headwinds from global uncertainty, the central bank chief, Mario Draghi, could sound amenable to stronger stimulus to keep the recovery on track. But should Mr. Draghi stop short of meeting markets’ dovish expectations, the euro would be at risk of adding to more than 8-cent gain since the spring. Surprisingly spendthrift U.K. consumers last month had the pound near one-month highs. Also in focus today: Data on Canadian retail sales, and U.S. weekly jobless claims and existing home sales.


A concerned tone from the ECB that sounded the alarms over downside risks to both growth and inflation knocked the euro to more than two-week lows against the dollar. Mario Draghi said that the level to policy stimulus would be revisited at bankers’ next and final meeting of the year on Dec. 3. Mr. Draghi met markets’ dovish expectations, opening the door to a potential avalanche for the euro over the short run.


Sterling bulls have reason to cheer(s). British retail sales soared 1.9 percent in September for the fastest rate in nearly two years. Sporting event beer sales were credited with the sharp surge in spending. The boost to sterling though was short-lived; particularly after the previous month’s 0.2 percent gain got erased and revised to -0.4 percent. Gains for sterling have been stymied of late as negative inflation has many skeptical of a U.K. rate hike anytime soon.


The Aussie dollar notched a two-week low amid elevated expectations for the Reserve Bank of Australia (RBA) to slash its key rate from 2 percent before the end of the year. Markets have assigned about a 25 percent chance of a rate cut at the RBA’s next meeting on Nov. 3.


After Wednesday’s growth downgrade from the Bank of Canada, the loonie finds itself stuck in the middle between 11-year lows hit in late September, and three-month peaks hit a week ago. Not much of a decisive reason to budge the loonie from the neutral zone after Canadian retail sales topped forecasts with a 0.5 percent gain in August.


The dollar climbed to its highest in two weeks, following bullish news on America’s job market and a decidedly dovish ECB. Jobless claims undershot forecasts with a rise to 259,000 from 256,000, which was better than forecasts of 265,000. With the weekly number keeping close to 42-year lows, it bodes well for the next monthly jobs report, due Friday, Nov. 6. The dollar could struggle to break meaningfully higher in the run up to the coming Fed meeting on Oct. 27-28. Should the Fed gesture another lukewarm endorsement of a rate hike by year-end, upside for the buck would tend to prove relatively modest.

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