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Currency Market Analysis

Feb 10, 2021 | Currency Market Analysis

Global Themes

Caution ahead of key events today helped the U.S. dollar stabilize after sinking to two-week lows. The greenback rose against the yen, was little changed against the euro and loonie, though sterling rallied to its highest in almost three years. The U.S. currency carried a three-day losing streak into a session that features fresh news on American inflation and a speech by Fed Chairman Jerome Powell. Consumer inflation is forecast to tick up to a 1.5% annual rate in January from 1.4% in December, a still-low level that points to the Fed keeping its foot firmly depressed on the policy pedal over the foreseeable future. A Fed chairman that should signal acquiesce over any uptick in inflation could buy the dollar more time below recent two-month peaks. Mr. Powell will participate in an Economic Club of New York webinar starting at 2 p.m. ET.


The U.S. dollar went from steady to subdued after underwhelming inflation kept the Fed on a path of low interest rates for longer. Core consumer inflation slowed more than expected to a 1.4% annual rate in January, below forecasts of 1.5% from 1.6% in December. A weak job market and tepid inflation is a recipe for a weaker dollar as it shows the economy still reliant on the Fed’s low rate policies.


Canada’s dollar neared three-week highs as oil pushed to new highs while underwhelming U.S. inflation weighed on the greenback. Oil prices notched new one-year peaks above $58, moving crude ever closer to $60. OPEC for now maintaining a policy of reduced output, coupled with optimism about Washington delivering more pandemic relief, has sketched a brighter, loonie-positive outlook for oil markets.


The euro steadied after notching 1 ½ week highs against the greenback. A tighter interplay this week between a weaker dollar and stronger risk appetite has weighed on the greenback and helped the single currency rebound from two-month lows. Meanwhile, currency players also see scope for the potential of stronger U.S. pandemic relief to ultimately boost risk sentiment, a scenario that carries downside risks for haven assets like the dollar.


Same pillars of strength, new highs for the U.K. pound. Sterling powered above another big figure against the greenback to its highest level in nearly three years. The pound has dominated the FX fast lane so far this year which began with a Brexit deal with the EU that alleviated a significant source of uncertainty. Britain’s rapid rollout of Covid-19 vaccines has buoyed the pound and helped pull forward recovery expectations. Add it all up and the odds of the Bank of England cutting interest rates have greatly diminished. While stronger, any disappointing news Friday when Britain issues key growth data could put a brake on sterling’s surge.

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