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Currency Market Analysis

Aug 17, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar nursed a weak bias with attention on U.S. politics and Fed policy. The greenback kicked off the week with mild losses against the euro, sterling and Canadian dollar. Currencies, though, kept to their range in thin August trade. The dollar favored the lower end of the range after U.S. retail sales last week underwhelmed and increased doubts about the durability of America’s economic recovery from the coronavirus-induced recession. Politics will dominate the spotlight this week, as the Democratic National Convention gets underway in Milwaukee. Meanwhile, adding to America’s vexing growth outlook, weekend trade talks between the U.S. and China were postponed. Midweek Fed minutes also will be a focal point. Dovish minutes that sound amenable to the central bank tolerating inflation above its 2% target could reinforce a weak dollar bias. 


The euro held firm and within striking distance of recent 2018 peaks against the greenback. Europe’s relative rosy economic prospects will be tested by late week numbers on factory growth. Ahead of the Friday PMI surveys, the euro could be poised to test recent peaks if midweek Fed minutes sound sufficiently dovish to set the stage for new action, such as tolerating higher inflation which would emphasize an outlook of low rates for longer.


Sterling wavered around the top of its range against the greenback, keeping near five-month peaks. The pound has enjoyed a summer surge against the dollar, built largely on the greenback’s rapid decline and scaled back expectations of the Bank of England adopting negative borrowing rates. Key numbers are due from Britain this week on inflation Wednesday, seen steadying at low levels, and retail sales and flash PMI indices. Consumer spending is forecast to rise for a third straight month in July, albeit at a slower pace of 2.3% after a nearly 14% surge in June. 


A stronger loonie hovered close to the 6 ½ month highs clocked last week versus its southern counterpart. Key focus for Canada this week will be consumer data Wednesday on inflation and Friday on retail sales. While the monthly gauge of consumer prices is forecast to moderate to 0.4% in July from 0.8% in July, consumer spending Friday is forecast to spike at a blistering rate of 24.5% for June compared to May’s robust surge of 18.7%.


The U.S. dollar favored the lower end of a tight range ahead of data that could offer more evidence of a decelerating recovery. Today’s Empire State index is forecast to grow for a second straight month in August but at a slower rate of 15.0 from 17.2 in July. Signs of a sputtering recovery could keep the dollar tilted on its back foot.

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