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Currency Market Analysis

Jan 15, 2020 | Currency Market Analysis

Global Themes

Dollar fazed ahead of 'phase 1' trade pact

America’s dollar was slightly fazed ahead of today’s scheduled signing of a ‘phase one’ trade agreement between the U.S. and China. The euro climbed to one-week peaks while the yen stabilized above eight-month lows. Sterling kept on its back foot after U.K. inflation surprised to the downside, raising the stakes for an imminent interest rate cut. The Canadian dollar and oil markets were little changed. The U.S. currency softened on caution ahead of today’s signing ceremony at the White House on a first phase trade agreement. The details of the initial trade pact will be released. The risk of the fine print underwhelming has both markets and the greenback treading cautiously.


Sterling remained on its back foot after the weakest U.K. inflation in years raised the stakes for an imminent rate cut by the Bank of England. The cost of living slowed to a 1.3% pace in December, the weakest in three years. A growing number of BOE officials have warned about a possible rate cut if the Britain’s economy continued to sputter. Today’s data added to a growing pile of evidence of the world’s No. 5 economy slowing, putting the chance of a rate cut on Jan. 30 at more than 60% – a significant rise from around 5% early last week.


Mixed U.S. data largely offset to leave the greenback slightly weaker on the day. Wholesale inflation remained tepid in December but the Empire State Index of New York area business conditions unexpectedly improved. This week’s numbers so far are consistent with modest growth, keeping the outlook unchanged for steady Fed policy as far as the eye can see.


The euro rallied in relief after German growth, while the weakest in years, didn’t surprise to the downside. The single currency inched up to one-week highs after data showed that Germany grew at a 0.6% pace for all of 2019, the weakest since 2013. While the data didn’t torpedo the notion that Europe’s biggest economy had weathered the worst of the slowdown, it also didn’t inspire confidence about a marked rebound taking shape. Consequently, the data is unlikely to move the euro far from its narrow range.


Canada’s dollar steadied, along with oil, ahead of today’s signing of a U.S.-China ‘phase one’ trade deal. A small but significant step toward a more meaningful trade agreement between the world’s two largest economies would bode well for Canada’s export-driven economy. The loonie, last year’s strongest major currency, has settled into a confined range ahead of the Bank of Canada’s first policy decision of the year on Jan. 22. Canada’s stronger than expected jobs report last week suggested a near certainty of the BOC keeping its policy rate steady next week at 1.75%.

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