Currency Market Analysis

Sep 01, 2020 | Currency Market Analysis

Global Themes

GBP/USD bucked the August trend of weakening and rose over 2% - the highest August rise since 2005. GBP/EUR hit a 10-week high above €1.12 and EUR/USD clinched a fourth monthly rise in a row whilst the US Dollar index hit a new 27-month low. The dollar’s inverse correlation with equities saw the US S&P 500 score its best August performance since 1986.

The selling pressure on the US Dollar intensified over August, especially after the dovish speech by US Federal Reserve (Fed) Chairman Jerome Powell who indicated the central bank will seek to achieve inflation that averages 2% over time. This effectively means interest rates will remain lower for longer. Also dogging the dollar is the worry that the economic recovery in the US is slowing compared to Europe and the lack of fresh fiscal support, due to the deadlock between Democrats and Republicans, may exacerbate the deteriorating situation.

Furthermore, overall risk appetite remains elevated across financial markets as hopes of a vaccine for coronavirus are growing.

CAD

The Canadian dollar continued its extended string of winning weeks versus the USD breaking the psychological level of 1.3000 for the first time since January 2020. The historical Fed policy shift on inflation announced last week by Federal Reserve Chair Jerome Powell at the Jackson Hole meeting continues to put a lot of pressure on the greenback not only against the major currencies but also against emerging currencies. This week is full of important data for the Canadian economy with the purchasing managers indices from Markit and ISM that will be released today at 9:45 and 10:00am and employment numbers released on Friday at 8:30am. 

EUR

Despite plenty of good news being priced into the Euro and speculative positioning being stretched, the dominant dollar-weak story continues to drive EUR/USD closer to the pivotal $1.20 barrier. This is capping GBP/EUR from extending aggressively higher like GBP/USD has done over the past month.

Yesterday, data revealed that German inflation stagnated in August following the fall into negative territory in July, which confirms the deflationary impact of the coronavirus crisis on economies. Overall Eurozone inflation will be released at 10:00 today and both headline and core consumer price index (CPI) are forecast to dip lower. Still, with the European Central Bank already undergoing large asset purchases and low CPI being a global phenomenon, these lacklustre inflation readings may not rattle the common currency. Meanwhile, German retail sales data drops in on Wednesday and for the overall Eurozone on Thursday along with final services PMI readings.

EUR/USD is likely to bump into stiff resistance around the $1.20 level and is at risk of recoiling from that level. However, a clean break could trigger more stops and the climb higher may accelerate. It appears the path of least resistance may be lower from here though.

USD

September has started how August finished – with dollar weakness dominating. The negative USD real yield narrative is the prime driver of this weakness, and despite the US currency being circa 11% weaker from its 2020 peak against a basket of currencies, many analysts are predicting more losses on the horizon. Key US macro data will drop in throughout the week with focus on the high profile labour market report on Friday.

After Mr Powell cemented the negative real yield narrative for the dollar last week, the dollar’s decline sped up. Should we continue to see a steadily improving global economy and negative real interest rates in the US, then this dollar-weak trend is likely to stick around. Nevertheless, the lingering fear of another disruptive wave of Covid-19 cases threatens to reverse the revival of risk appetite and the dollar may strengthen in such circumstances.

On the data front this week, US ISM manufacturing is released this afternoon and should increase modestly while ISM non-manufacturing on Thursday is forecast to modestly decline. US non-farm payrolls on Friday may disappoint a little, and this should underscore the need to keep US interest rates low.


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