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Currency Market Analysis

Nov 29, 2018 | Currency Market Analysis

Global Themes

The U.S. dollar remained on the defensive after a Fed-inspired swoon to its lowest in nearly a week. The dollar was pinned near session lows against the euro and yen but was flat to stronger versus rivals from Canada and Britain, respectively. The dollar dropped like a stone Wednesday after the head of the Fed suggested that U.S. interest rates were closer to a neutral level than markets had appreciated. The so-called neutral zone, thought to be around 2.50% to 3.50%, is considered an important signpost for the dollar as it’s the point at which the central bank could slow or pause its rate hiking cycle. Still, Fed Chairman Powell also said that monetary policy wasn’t on a ‘preset’ path and indicated that data would ultimately guide its policy decisions. That puts heightened focus on U.S. data today on consumer spending and inflation, and the minutes from the last Fed meeting. 


The euro briefly smooched a key technical top against the dollar after the U.S. currency’s Fed-induced tumble. That key barrier, coupled with downbeat European data that has dimmed euro sentiment and pushed back area rate hike expectations, suggests limited room for the euro to rally over the short run. The euro caught a gentle tailwind after German unemployment improved to an all-time low of 5% in November, though inflation slowed from six-year highs. 


Canada’s dollar stabilized above five-month lows as the greenback nursed Fed-induced losses and oil rebounded after an overnight slide below the key $50 threshold. The loonie also found support from Canada’s economy after data showed a bigger than expected improvement in the nation’s current account deficit – a broad measure of trade – to C$10.34 billion in the third quarter from more than C$16.6 billion in the second quarter. For the loonie to sustain momentum, data Friday on Canadian third quarter growth would likely need to fare better than expected.


Sterling dropped after a Fed-inspired pop to its highest in nearly a week. The pound experienced the gravitational pull of uncertainty over whether Britain would approve the prime minister’s Brexit deal. Moreover, a dire warning from Bank of England Gov. Mark Carney also weighed on the pound as he painted a bleak economic picture under a no deal scenario. Mr. Carney said both the U.K. economy and its currency could experience significant weakness if Britain chooses an exit that produces the most instability. 


The dollar stuck near session lows after mixed data on the U.S. economy largely validated Fed Chairman Powell’s dovish message. Data depicted a strong consumer whose incomes and spending exceeded expectations. However, underlying inflation slowed by a tick to 1.8% in October, below the Fed’s 2% sweet spot. Tepid inflation fits neatly with the view that the Fed could shift to a slower pace of rate increases after an expected hike to a range of 2.25% to 2.50% on Dec. 19. The Fed will issue the minutes of its last meeting today at 2 p.m., records that could be important for the Fed-focused dollar. 

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