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Currency Market Analysis

Jan 20, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar fared mixed but mostly firmer on Inauguration Day. The dollar edged up as gains against the euro offset declines versus risk sensitive peers like sterling and Canada. The market mood brightened ahead of Joe Biden’s swearing in ceremony to become America’s 46th president. The new administration is expected to push an agenda of stronger stimulus of nearly $2 trillion in a bid to put the recovery on a better path. Optimism over stimulus buoyed sentiment, boosting currencies like the U.K. pound, Canadian dollar and emerging markets. Meanwhile, worries about the prospect of prolonged, economy-crimping lockdowns in Europe weighed on the euro and kept it close to six-week lows.


Sterling rallied to May 2018 highs against the greenback as risk appetite increased and area inflation warmed more than expected. The case for negative U.K. inflation rates weakened a bit in data showing consumer prices rose at a 0.6% annual rate in December, a tick above forecasts of 0.5%, and double November’s 0.3% increase. Britain’s cost of living was boosted by higher oil prices which have climbed further and north of $50 in January, which bodes well for continued price growth in the months ahead.


The euro slipped as the risk of longer lockdowns in Europe kept alive the threat of a double-dip recession. Meanwhile, the ECB has an opportunity to add some traction to the euro’s decline when it issues its first policy announcement of the year Thursday. While no changes are expected, the ECB could emphasize its dovish bias, a tone that could tighten an early year lid on the euro.  


The loonie rose against an otherwise firmer greenback, supported by risk appetite with stocks and oil markets in positive territory amid hopes for America’s next president to advance a pandemic-crushing agenda. Upside for the loonie was checked by inflation data that underwhelmed, a surprise outcome that could give the Bank of Canada, which issues its first policy decision of the year today at 10 a.m. ET, cover to emphasize downside growth risks and potentially open the door wider to loonie-negative lower interest-rate policy.

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