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Currency Market Analysis

May 13, 2020 | Currency Market Analysis

Global Themes

Negative rate debate stalks dollar

The greenback tilted downward ahead of a speaking appearance today by the Fed chair. Broad declines pushed the U.S. unit lower against big peers from Europe, Japan and Canada. While softer, the U.S. currency kept to confined ranges against its rivals. Jerome Powell will dominate the spotlight when the Fed boss speaks at 9 a.m. ET. Markets will seek an update on whether the Fed’s stance on negative interest rates has changed. The central bank has downplayed prospects of adopting negative borrowing rates. But in light of soaring unemployment and plunging inflation, markets will be all ears to see if negative borrowing rates are now a possibility. The dollar could snap out of its mini funk if the Fed chair quashes markets’ low but rising expectations of negative rate policy in the months ahead.


The loonie firmed in the back of improved risk sentiment and a subdued greenback. But gains for stocks and oil lacked conviction, keeping USDCAD anchored to well-worn ranges. While oil has stabilized of late, prices have struggled to extend recent gains which has offered limited fuel for commodity-driven currencies. Investor tolerance for risk has been held in check by the downside risks to growth if economies reopen too quickly and set off a second round of virus infections.


Sterling flashed some resilience as it rebounded after a data-induced tumbled to three-week lows. The pound took on water after data showed the U.K. economy contracted by 2% during the first quarter and by a record 5.8% for the month of March. The sobering data added weight to a central bank warning that the downturn could be the steepest in centuries. Positive, though tentative, risk sentiment is masking for now pound negatives stemming from fundamental weakness and Brexit uncertainty.


A subdued dollar helped the euro firm toward the top of a narrow range. Still, the euro may be skating on thin ice after data showed a record slide in euro zone industrial production. The data served as a harbinger of more bad news Friday when the bloc issues first quarter growth. The data is expected to confirm a record contraction of 3.8% in the January-March quarter, a bearish scenario that would keep pressure on the ECB to strengthen stimulus.


The dollar pared declines after Jerome Powell quashed the notion of the Fed adopting negative interest rates to resuscitate its coronavirus-throttled economy. Mr. Powell said that the Fed would continue to use its main policy tools of asset purchases and forward guidance to help hasten an economic revival later this year. Mr. Powell’s resolute downplaying of negative rates will be music to the ears of dollar bulls who may use today’s event to bid the greenback higher.

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