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Currency Market Analysis

Dec 16, 2020 | Currency Market Analysis

Global Themes

An overnight slide pushed the U.S. dollar to fresh lows. European currencies received a data-inspired boost, lifting the euro, sterling and Swiss franc to multiyear peaks. Canada’s dollar heeded a central bank warning over “material” currency appreciation ahead of important data on domestic inflation. The dollar’s negative forces have intensified as investors cheer the rollout of vaccines in the U.S. Meanwhile, hope is on the rise for a Brexit deal, while Washington signaled a resolve to strike an aid deal before lawmakers break for the holidays. PMI numbers from Europe surprised to the upside, tempering fears of a double-dip recession. Out of the U.S. today, retail sales are forecast to contract for the first time since the spring. As for the Fed today when it issues its policy update at 2 p.m. ET, there is more of a risk of policymakers topping up the punch bowl than taking it away.


Growing optimism about a Brexit trade agreement, coupled with a bigger than expected bounce on British factory growth, hurled the U.K. pound to fresh May 2018 highs. The tone of Brexit developments has been encouraging, spurring hopes that the UK and EU may be making significant strides toward a compromise trade pact. The pound is rallying in relief with the weakening dollar adding traction. Still, economic headwinds remained near the surface as British inflation slowed sharply to an annual rate of just 0.3% in November from 0.7% in October.


The U.S. dollar was anchored near fresh 2 ½ year lows after disappointing news on America’s primary growth engine. Retail sales plunged 1.1% in November which was worse than forecasts of a 0.3% fall. Consumer spending actually contracted for a second straight month, as October got downgraded to -0.1% from an initial increase of 0.3%. The data offered more compelling evidence of a deteriorating recovery from the pandemic which will dial up already intense pressure on Washington to deliver a massive amount of stimulus. Downbeat data of late on hiring and the consumer will cement expectations of another dovish message from the Fed today, an easy stance that has compounded the dollar’s rout.


The Canadian dollar softened from 2 ½ year highs, heeding a warning over “material” currency strength from the head of the Bank of Canada. Fresh inflation figures from Canada largely offset and had limited impact on the loonie. Headline, or total, inflation rose more than expected to an annual rate of 1% in November, while core prices slowed by a tick to 1.5%. Inflation remaining tame and below the BOC’s 2% goal is consistent with the central bank maintaining loose policy for longer.


The euro charged to fresh April 2018 highs against the greenback after better than expected data from Europe’s biggest economy tempered fears of a double-dip downturn. A preliminary gauge of German factory growth unexpectedly accelerated to 58.6 in December, compared to forecasts to slow to 56.4 from 57.8 in November. The good news may contrast the picture of America’s main growth engine today as consumer spending is forecast to contract for the first time in seven months.

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