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Currency Market Analysis

Feb 03, 2021 | Currency Market Analysis

Global Themes

The greenback squeezed more juice out of a rally that’s lifted it to two-month highs. The stronger buck notched another two-month top against the euro and made gains against rivals from Japan, Britain and Canada. Global growth differentials are casting the dollar in a comparative better light which has triggered a steady squeeze higher. Dollar bulls have been excited by signs that Washington may be moving toward another massive dose of economy-boosting pandemic relief to help right a wobbly recovery. In Europe, extended lockdowns have dominated the spotlight, raising the risk of another economic contraction in the first quarter. The euro was little swayed so far by news that Italy’s president wants former ECB chief Mario Draghi to form a government. Mr. Draghi arguably saved the euro during the bloc’s debt crisis and such a credible figure potentially becoming Italy’s next prime minister could stave off deeper declines for the euro.


The dollar had its rally to two-month highs cemented by more evidence of U.S. economic outperformance. Payroll company ADP said that private employers added a forecast-crushing 174,000 jobs in January which compared to expectations of an increase of 49K. The data which isn’t always an accurate barometer of how nonfarm payrolls, due Friday, might fare. Still, the surprise strength of ADP suggested a lower risk of a downside miss. Nonfarm payrolls likely rose by 50K in January after falling by 140K in December.  


Canada’s dollar was broadly steady and off its lows thanks to oil markets holding near one-year peaks around $55. The loonie could be vulnerable in the day ahead if Wall Street struggles to sustain recent gains. The loonie will look for a fundamental driver in Canada’s employment report Friday that’s forecast to show the job market shed jobs (about 50K) for a second straight month.


The euro continued a downward drift that pushed it to fresh two-month lows against its U.S. counterpart. The euro shrugged off ECB-friendly news that showed a bigger than expected rise in inflation to an annual rate of 0.9% in January after spending several months below zero, a deflationary zone. Higher inflation is welcome news for the ECB but it’s likely to be a long time yet until inflation hits and stays at the central bank’s target of just below 2%. The euro was slow to respond to news that “Super Mario” Draghi may soon become Italy’s next prime minister and potentially bring some political stability to Rome.


Sterling weakened below multiyear highs on caution ahead of the Bank of England tomorrow and after data confirmed that Britain’s influential services sector remained stuck in reverse for a third straight month in January. The market is braced for a mix of caution and optimism from the U.K. central bank Thursday. To keep the pound’s overall winning streak intact, the BOE would have to leave policy unchanged and signal that while negative rates are possible, their imminent deployment is unlikely.

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