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Currency Market Analysis

Jan 29, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar fared steady overall Friday, though Wall Street’s wild week had it poised for a weekly gain. The euro and sterling firmed, boosted by slightly better than expected data from the continent’s largest economy: Germany. Canada’s dollar rebounded from five-week lows ahead of the nation’s November growth report. The greenback was on track for a monthly gain as weak data dampened optimism about a meaningful economic recovery anytime soon. Meanwhile, still-high U.S. jobless claims suggested another week reading next week when America issues its January jobs report. In addition to Canada’s November GDP report, seen rising by 0.4%, market players also will parse influential U.S. numbers on consumer spending and inflation.


Mixed news on the U.S. economy largely offset to keep the dollar largely sideways on the session. Consumer spending fell 0.2% in December which wasn’t as bad as forecasts of a bigger decline. Personal income surprised to the upside, with a 0.6% jump, a good sign for future spending. Inflation warmed as the core PCE index, the Fed’s main inflation yardstick, unexpectedly accelerated to a 1.5% annual rate from 1.4%. Still, the market wants to see the whites of the eyes of 2% inflation before dollar bulls get excited.


Evidence of a resilient Canadian economy translated into support for the loonie which pushed off five-week lows. Canada’s economy grew at a 0.7% pace in November, easily eclipsing forecasts of a 0.4% increase, and marked a surprise acceleration from October’s expansion of 0.4%. Still, the economy was at risk of a renewed slowdown as Canada forecast December growth of around 0.3%. The loonie was on track for a weekly decline as it succumbed to global stock market volatility that boosted the safe haven greenback.


The euro caught a data-inspired bounce that allowed it to erase a few of its modest weekly declines. The market breathed a sigh of relief after German surveys that slightly beat forecasts as unemployment steadied at 6% while the growth eked out a 0.1% increase in the fourth quarter. The outlook remains subdued for Europe’s top economy, however, suggesting the euro’s data-inspired gain isn’t likely to prove meaningful.


A tenacious pound was on course for a weekly gain against the otherwise firmer greenback. Sterling, consequently, kept within arm’s reach of 32-month peaks, buoyed by U.K. vaccine optimism that could go some way in shortening the current bout of economic weakness. Sterling faces a daunting event risk in the Bank of England’s first policy decision of the year on Feb. 4. A central bank that should play up economic weakness would suggest a still-open door to negative interest rates, a narrative that could check sterling’s rise.

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