Currency Market Analysis
Dec 15, 2020 | Currency Market Analysis
Hopes for pre-Christmas stimulus from Washington bolstered risk appetite and kept the greenback languishing near lows for the year. The euro, sterling and Canadian dollar held the upper hand against their U.S. counterpart, as the trio hovered around 2 ½ year peaks. The buck has come under increasing pressure as hopes for more aid from Congress and the deployment of a coronavirus vaccine have brightened prospects for economic activity. The dollar tends to struggle as investors grow confident and seek out assets that stand to appreciate from improving growth prospects. The greenback also is favoring its back foot with the Fed in the spotlight. The Fed is expected to issue dollar-negative dovish guidance when it renders its final announcement of the year Wednesday. While the weak dollar narrative may extend into 2021, it could catch a break given its oversold state.
Sterling kept to the upper end of its range, buoyed by growing optimism in the UK and EU reaching a compromise Brexit deal. Europe’s weakened economic backdrop suggests that neither the UK or EU could afford a disorderly no-deal breakup at the outset of 2021. The spotlight on Brexit helped the pound weather more worrisome news on the UK job market as unemployment pushed increasingly higher, reaching 4.9% in the August-October period, the highest in over four years.
Canada’s dollar kept on offense against its U.S. rival, keeping USDCAD near 2 ½ year lows. Elevated risk appetite and the distribution of a Covid-19 vaccine have given a shot in the arm to growth prospects, bolstering investor confidence at the expense of the greenback. An important week for the Canadian economy started on a mixed note as house starts surprised to the upside but manufacturing sales slowed more than expected. Canadian inflation Wednesday is expected to inch higher while slower consumer spending is anticipated Friday.
The euro steadied near recent peaks, its highest since April 2018 against the greenback. Against the pound, however, the single currency has lost some buoyant which for now has capped upside versus the greenback. While the outlook remains positive for the euro, an inability to revisit or surpass recent highs against the struggling greenback could set the stage for a short-term correction lower. Having appreciated more than 8% this year, EURUSD appears ripe for some year-end profiting.
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