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Currency Market Analysis

Jun 17, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar was mostly steady after an overnight climb to two-week peaks. The euro stabilized after sinking to two-week lows while sterling dangled near a January bottom. Rivals from Japan and Canada were little changed. The proverbial calm before a potential storm descended on FX markets with few staking big wagers ahead of the Federal Reserve’s midweek policy decision. General expectations call for the Fed to hold fire on a rate cut just yet after bullish data last week on the U.S. consumer. Key for the dollar will be whether the Fed validates markets’ high hopes for easing as soon as next month, which would tend to be dollar-negative, or if the Fed is tight-lipped on the path ahead for policy, which would likely support the dollar, wanting to see more data and the outcome of next week’s G-20 summit that might be pivotal for the U.S.-China trade war. 


The euro steadied as its ability to keep above key support lent it a bit of a reprieve. The euro overnight hovered around two-week lows against its U.S. counterpart. The euro will look for direction today from a speech around 1 p.m. ET by ECB chief Mario Draghi. Any tone that plays up uncertainty and a fragile European economy would be perceived as step toward another round of monetary medicine, a potential catalyst that could knock the euro below support. 


The U.K. pound held dangerously close to January lows against the greenback. Brexit uncertainty continues to simmer in the background to the detriment of the pound. Britain is in the process of choosing a new Conservative leader, one that shows Brexit advocate Boris Johnson in the lead. Anything that raises the risk of Britain taking the disorderly, no-deal route out of the EU tends to play out as pound negative. Britain’s week ahead includes influential inflation data Wednesday followed by a Bank of England policy decision Thursday. 


The dollar edged off two-week highs after fresh evidence of a fragile underbelly in U.S. manufacturing. Slower growth was on the cards for the Empire State index. Instead the data posted a record slide that pushed the index below zero into contraction territory with the minus 8.6 reading in June the weakest in 2 ½ years. The data followed the ISM index weeks ago that also showed the weakest growth in years. The weak print was the type that argues for lower interest rates. A surprise rate cut this week would wrongfoot most of the market and leave the dollar at risk of a big move backwards. 


Canada’s dollar steadied, albeit with a defensive bias that kept it around 1 ½ week lows against the greenback. Oil started the week with a 1% decline to around $52. A big week ahead for Canada features inflation data Wednesday, the same day the Fed issues its much-anticipated policy decision, and retail sales Friday. Core inflation is expected to hold a smidge below the Bank of Canada’s 2% goal. Retail spending is expected to cool to a 0.2% increase in April. Retail sales could surprise to the upside given record strength in the job market with unemployment running at an all-time low of 5.4%.

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