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Currency Market Analysis

May 12, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar pared gains after legging higher Monday. The softer greenback allowed rivals from Europe, Japan and Canada to strengthen. Improved, though still cautious, risk sentiment boosted emerging markets. Appetite for the U.S. currency cooled ahead of key event risks over the next 24 hours. Looming today is a reading on U.S. consumer prices which are forecast to fall for a second straight month. Lower inflation would raise concerns over an unwelcomed bout of deflation, a scenario that could keep Fed interest rates near zero for longer. Has low inflation and record job losses made the Fed more inclined to adopt negative interest rates? That’s the key question that markets will look for answers when Jerome Powell speaks tomorrow. A resolute ‘no’ from the Fed chairman could help keep the greenback biased higher.


The dollar kept mildly in the red on the session after the weakest U.S. inflation since the Great Recession. As expected, U.S. consumer prices tumbled 0.8% in April, the most since December 2008. That marked the second month in a row of negative price growth which increased the threat of deflation. A sustained slide in inflation would come at already bad time for an economy that has been punched in the nose by the coronavirus. Market watchers will be all ears to see if the Fed has softened its stance with respect to negative interest rates in the wake of mounting evidence of a crumbling economy.


Canada’s dollar firmed, supported by oil markets extending their recovery from historic lows. Crude was up around 5% to $25, not far from one-month peaks. Gains have been limited for commodity currencies on worries that if economies reopen too quickly it could increase the threat of a second round of coronavirus infections. A dearth of Canada indicators this week has the loonie taking its main cues from broader risk sentiment. 


Sterling inched higher thanks to a moderation in demand for the U.S. currency. Underlying sentiment remained fragile for the pound with the Bank of England warning of the deepest recession in centuries. The pound is also feeling the gravitational forces of Brexit uncertainty as doubts grow about a trade deal by year-end. The pound’s rise Tuesday isn’t likely to get it far ahead of Wednesday growth data that’s forecast to show the world’s No. 5 economy contracted by a substantial 2.5% in the first quarter.


The euro edged up, boosted by cautiously improved risk sentiment that tempered demand for the U.S. currency. Risk tolerance is toggling between optimism as economies reopen and trepidation about potentially having to re-stop economic activity if coronavirus infection rates reaccelerate. The ebb and flow of risk sentiment has kept the euro confined to the lower bound of its range. 

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