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Currency Market Analysis

Dec 14, 2020 | Currency Market Analysis

Global Themes

The last full week of the year started with a weaker U.S. currency as markets cheered ongoing Brexit negotiations. Up 1.5%, sterling led the charge higher against the greenback with the euro and Canadian dollar up at least 0.3%. Down Under, the Aussie and kiwi dollars rolled to new 2018 highs. Market optimism brightened as UK and EU officials agreed to continue Brexit negotiations after a Sunday deadline came and went without any tangible progress. Vaccine distribution in the U.S. and hopes that Washington may soon agree on more pandemic relief added to the upbeat mood. The last full week of the year will be a busy one, headlined by a midweek policy decision from the Federal Reserve and news on consumer spending. The market also will monitor Brexit developments and a Bank of England announcement Thursday.


The euro rose toward recent 2 ½ year highs as investors embraced risk at the expense of the safer greenback. Data also supported the euro as a gauge of factory growth for October across the 19-nation bloc topped expectations with a 2.1% increase. The data, though, isn’t likely sustainable as businesses have since had to re-impose economy-crimping restrictions in a bid to slow the rapid spread of the coronavirus. 


Risk-on sentiment and stronger oil markets had the Canadian dollar in close range of multiyear peaks. Markets are starting the week in an optimistic mood as talks continue in Europe on a Brexit agreement and in Washington on fiscal aid. Canada this week publishes top-tier data on inflation Wednesday and retail sales Friday that will shed light on the strength of the recovery from the pandemic-induced recession. Overall inflation is forecast to tick up to a still-low annual rate of 0.8% in November. Slower spending of 0.2% in October from 1.1% in September is expected Friday.


No progress toward a Brexit deal but also no collapse in negotiations was enough to light a fire under sterling. Brexit is such a sensitive subject for the pound that the bar is set low to inspire moves both to the upside and to the downside. Sterling’s behavior suggests that markets are priced for some sort of trade agreement ahead of the next phase in relations that are expected to begin on Jan. 1. Data this week will also come into play for sterling with unemployment on Tuesday expected to rise while inflation and retail sales on Wednesday and Friday are forecast to fall. The Bank of England Thursday may decide to adopt a wait and see stance amid heightened Brexit uncertainty. 

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