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Currency Market Analysis

Jan 27, 2021 | Currency Market Analysis

Global Themes

Global market weakness buoyed the U.S. dollar ahead of the Federal Reserve’s first policy announcement of the year. Across the board gains lifted the dollar above fresh 32-month lows against sterling while it also outperformed the euro and Canadian dollar. The Aussie and kiwi dollars along with emerging markets were also on their back foot. Pre-Fed caution is dovetailing with worries that the relentless pandemic could delay an eventual economic boom. The dollar’s safe haven-inspired rally may hinge on the Fed today. Come 2 p.m., America’s central bank will issue a policy statement, followed by a press conference by Chairman Jerome Powell. A central bank that sees the latest economic setback from the pandemic as temporary could allow scope for policymakers to taper stimulus later this year, a scenario that could prove supportive of the greenback.


Subdued global markets, including oil, coupled with a stronger greenback had the loonie dangling near one-week lows. Commodity cousins from Down Under, the Aussie and kiwi, also underperformed, a clear sign of investor caution ahead of today’s Fed decision. Risk markets are on edge as the short-term economic outlook grows murkier due to the raging pandemic. Still, expectations of an economic boom later this year could allow scope for the Fed to taper its greenback-negative bond purchases.


Sterling unwound gains that had propelled it to fresh 32-month highs against the greenback. The pound continues to bask in Britain’s relatively smooth vaccine rollout that could go some way in shortening what may prove to be a double-dip recession. But lurking near the surface for the pound is mounting worries about Britain’s economic health with unemployment at multiyear highs of 5% and seen climbing further over coming months, a worrisome sign for consumer spending and the wider economy.


The euro received a bit of an ECB tongue-lashing that knocked it to the floor of its range. A member of the ECB’s governing council, Klaas Knot, said that the central bank was closely watching the value of the euro whose strength is a key reason why area inflation remains stuck below zero. Growing signs that the ECB is less tolerant of a strong currency suggests a lower bar for policymakers to push a key lending rate further below zero.


The U.S. dollar maintained broad gains after underwhelming U.S. durable goods added to risk-off sentiment. Durable goods rose by 0.2% in December, just a fraction of forecasts of a 0.6% increase. The subcomponent on business spending jumped by 0.6%, in line with expectations. While mixed, the data is consistent with the U.S. economy having experienced a virus-induced setback in December which cemented expectations for the Fed later today to reaffirm its dovish stance.

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