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Currency Market Analysis

Jan 29, 2020 | Currency Market Analysis

Global Themes

Will the Fed cool the dollar’s hot streak?

The U.S. dollar held court ahead of the Federal Reserve’s first policy announcement of the year, due at 2 p.m. ET. The buck was at or near two-month highs against the euro and Canadian dollar. Though steady against the yen, the U.S. unit scaled eight-week peaks against New Zealand’s dollar and hovered near three-month highs against the Aussie dollar. The dollar continues to benefit from concerns that China’s deadly virus could inflict harm on the world economy. Moreover, a string of mostly solid U.S. data cemented expectations for the Fed today to maintain steady lending rates in range between 1.50% and 1.75%. Markets are about 90% certain that the Fed will stand pat. What will shed light on the durability of the dollar’s rally is the Fed’s forward guidance. A dovish outlook that plays up global risks and low U.S. inflation would validate forecasts of a potential rate cut later this year.


Continued weakness drove the euro to fresh two-month lows against its U.S. counterpart. Any stabilization in European growth has been slow to materialize, weighing on the single currency. Economic fragility has kept the ECB from ruling out stronger policy to underpin low growth. By contrast, the Fed today could signal an elevated bar to lower rate policy over the short run given the underlying solid shape of the world’s biggest economy.


The Fed’s rate decision today will shed some light on the durability of the dollar’s gains. So far the buck is having a better month, up nearly 2% in January, than it fared for all of 2019 when it barely rose. Key for the dollar will be what the Fed emphasizes in its statement. Accentuating the economic positives of low unemployment and steady consumer spending would strike a dollar positive message. However, the Fed also could play up the downside risks to growth from manufacturing weakness, tepid business spending and renewed global risks stemming from the China virus. A balanced message would come across as dollar neutral.


Canada’s dollar languished near seven-week lows, succumbing to broad based greenback strength. The 1.5% rise in oil to above $54 wasn’t enough to apply a brake on USDCAD which rose 0.25%. Canada’s buck has been dogged by tepid data and an uptick in expectations for the Bank of Canada to lower interest rates from 1.75%. Key to the rate debate will be Canadian monthly growth on Friday that’s forecast to flatline in November.


Sterling seesawed around key support against the greenback. The pound slipped to week-plus lows this week as investors reduced exposure to the U.K. unit ahead of the Bank of England tomorrow and Brexit Day on Friday. The latest odds suggest about a 45% chance of a BOE rate cut Thursday to 0.50% from 0.75%. Any rally for the pound, if the BOE should hold fire, would hinge on the central bank’s forward guidance and whether it sets the stage for a rate cut as soon as the next meeting in late March.

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