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Currency Market Analysis

Sep 16, 2020 | Currency Market Analysis

Global Themes

Expectations of more dovish signals today from America’s central bank weighed broadly on the U.S. dollar. Across the board declines pushed the greenback lower against the euro, sterling and Canadian dollar. Against the new regime Japanese currency, the dollar neared a seven-week trough. Call it a Suga high for the yen, as it rose following the installation of Yoshihide Suga as Japan’s new prime minister. Broader markets rose ahead of the Fed’s 2 p.m. ET policy decision when it will also release fresh projections for the economy and lending rates. The dollar is struggling amid expectations that the Fed’s new forecasts could be mum on interest rate hikes beyond 2022 after it renewed a resolve to attain its 2% inflation goal. The Fed is likely to reaffirm its easing bias. But the Fed’s new forecasts, if upgraded, could allow scope for a dollar rally. After today, central banks Thursday in Japan and Britain will be in the limelight.


Greenback weakness helped mask for now sterling vulnerabilities related to Brexit and prospects of a disorderly split with the EU. Higher than expected U.K. inflation helped the pound pad its gain. British Inflation slowed less than expected to a low 0.2% in August from 1.0% which topped forecasts for price growth to fall to zero. Upside for the pound was considered limited ahead of a Bank of England policy update Thursday when the U.K. central bank could acknowledge a greater downside risks to growth from stalled Brexit negotiations.


The greenback fell to fresh lows against the yen after news on the economy-driving U.S. consumer underwhelmed. Retail sales rose for the fourth month in a row in August but the 0.6% increase missed forecasts of a 1.0% rise. The data is likely to take a back seat to today’s Fed decision. Key for the dollar will be whether the Fed’s so-called dot plot of interest rate increases pencils any for 2023. Low rate guidance for several years could dampen dollar sentiment.


The euro held the upper hand and the upper range against the dollar ahead of today’s policy decision by the Fed. Expectations that the Fed will signal low interest rates for years to come have weighed on the dollar to the benefit of its chief rivals like the euro. The euro, meanwhile, enjoyed a fundamental fillip this week after data showed a surprise increase in German investor optimism.


Risk-on global markets and higher oil above $39 buoyed the loonie against its weaker U.S. rival. The loonie pared gains, though, after mixed news on domestic inflation. The overall annual rate steadied at 0.1% in August, below forecasts of 0.4%. But core inflation which was expected to steady at 1.3% increased to 1.5%. The very benign data is expected to keep Bank of Canada interest rates at rock bottom levels just above zero for another couple of years.

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