Global Themes

America’s buck kicked off the week near its lowest level in a month as it continued to surrender altitude after a torrid second quarter. The dollar was at or near mid-June lows against most of its chief peers including the euro, sterling and Canadian dollar. Emerging markets were also buoyant with the Mexican peso clocking two-month peaks. Rival currencies have found a tentative positive in U.S.-China trade tensions which so far have played out largely in line with expectations. Other forces of dollar weakness include signs of stable U.S. inflation, which has markets rethinking how aggressively the Federal Reserve can raise interest rates, and healthier data from Europe that has tempered negativity toward the euro. Shaping FX sentiment this week will be data Tuesday on German investor optimism, an expected Canadian interest rate hike Wednesday, and U.S. reports Thursday and Friday on consumer inflation and consumer sentiment.


The euro continued to recover from recent lows thanks to signs of green shoots in the bloc’s biggest economy. Reports last week showed a healthy bounce back in German factory growth which offered evidence of the juggernaut economy turning the corner after a lackluster start to the year. Germany’s economy will hold center stage again this week with data Tuesday on the influential ZEW survey of investor optimism. Forecasts call for sentiment to dim in July, as trade uncertainty with Washington is expected to weigh. A better than expected outcome could allow the euro to push further away from recent lows. 


Canada’s dollar appreciated to mid-June highs thanks to market futures signaling a more than 90% likelihood of a local rate hike this week. Canada’s strong jobs report last week likely put the fork in expectations for the Bank of Canada to raise interest rates Wednesday to 1.50% from 1.25%. The BOC’s decision is due at 10 a.m. ET and could hold the keys to USDCAD’s near term prospects. While a rate hike is widely expected, what could matter most for USDCAD is the tone of policymakers’ statement. One that fails to keep the door open to further rate hikes could leave Canada’s currency a bit vulnerable. 


The dollar index slipped to mid-June lows as it continued to consolidate gains after rallying more than 5% during the second quarter, its best run since late 2016. While the U.S. created more than 200,000 jobs for a second straight month in June, a gauge of inflation held steady. Contained inflation could limit latitude for the Fed to raise rates this year, a scenario that has tapped the brake on the buck’s rally. Inflation will be in focus this week. If U.S. consumer prices rise from an annual rate of 2.8% in June as expected, it could help the dollar shake off its softer performance over recent days.


The Mexican peso climbed to two-month highs as a positive market backdrop buoyed higher yielding currencies. Trade tensions between the U.S. and China, while still elevated, eased a bit after the implementations of tariffs largely played out as expected. Global stocks were mostly higher, a sign of improved risk tolerance. A report today at 9 a.m. ET is forecast to show Mexican inflation rose from 4.5% in June. Higher inflation could keep the door open for Mexico’s central bank to raise rates from 7.75% in the months ahead.


Sterling gained after the loss of Britain’s Brexit secretary over the weekend gave rise to hopes of a compromise divorce deal with the EU that retains close trade ties. Sterling climbed to mid-June highs, its strongest in more than three weeks, on hopes for a soft Brexit scenario that’s seen as less damaging to the U.K. economy compared to a clean break or hard Brexit that Brexit chief David Davis preferred. Over the weekend, British Prime Minister Theresa May made the case to keep close trade ties with the EU after its planned exit in March 2019. While stronger, the pound is seen on volatile ground and could weaken if markets start to question Mrs. May’s hold on power.

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