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Currency Market Analysis

May 26, 2022 | Currency Market Analysis

Global Themes

The greenback hovered near one-month lows after this week’s Federal Reserve minutes struck a less hawkish note. Sterling jumped to three-week highs, while the euro climbed toward one-month peaks. Canada’s dollar was little changed ahead of key data on the country’s consumer. The notes from the Fed’s May meeting struck an overall hawkish tone as “most” officials thought it “would likely be appropriate” to raise rates by a hefty 50 basis points at the next two meetings. The minutes, though, cast some doubt on the rate path later this year as they were consistent with the Fed potentially slowing or pausing rate increases to gauge their impact on the economy. A less hawkish outlook for Fed policy would add to dollar vulnerabilities, given markets have recently anticipated rate hikes at each of the central bank’s remaining meetings this year. U.S. weekly jobless claims are expected to ebb from January highs, while Canadian consumers likely stepped up spending.

EUR

The euro stuck near one-month highs against the dollar as market attention remained fixated on the outlook for central bank policy. The euro received a shot in the arm after a host of ECB officials talked up the likelihood of Europe ending negative interest rate policy by September, a sooner timeframe than recently expected. The euro’s revival has gained traction from signs of a resilient German economy which contrasted softer readings from the U.S.

GBP

Sterling rose to three-week highs against the U.S. dollar on expectations that the UK government would step up support to households to help them better cope with the cost of living crisis. The government is expected to unveil a package of around GBP10 billion to help consumers pay for soaring food and energy prices. Sterling rebounded on hopes that substantial aid from the government would help to reduce the risk of a sharp slowdown in growth.

CAD

The Canadian dollar kept below three-week highs after unexpectedly weak data on the nation’s consumer. Retail sales stalled with a zero reading in March which missed forecasts of a 1.4% increase by a country mile. It helped at the margin that February spending got revised higher while Canada’s early estimate for April called for spending to rise by 0.8%. The data still keeps the Bank of Canada on track for a June 1 rate hike to 1.50% from 1% but it does show the highest inflation in decades weighing on the consumer.

USD

The U.S. dollar had little reaction to mixed data as it didn’t alter expectations for Fed rate increases. Weekly jobless claims printed at a low 210,000 in the latest period, the first improvement in four weeks. U.S. first quarter growth was downwardly revised to show that it shrank by 1.5%. This week’s Fed minutes looked past the economy’s weak start to the year, anticipating a solid bounce back in Q2. The jobs data offers a more timely reading on the economy and therefore carries more weight than the growth report, a good thing for the dollar.


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