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Currency Market Analysis

Feb 18, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar softened after its first two-day rally in weeks on caution ahead new data today on America’s weak job market. The greenback slipped against the euro, sterling and Canadian dollar. A U.S. economic surprise party has boosted the dollar this week as it revived the view of an American recovery outpacing its peers. U.S. consumer spending stormed back in January when retail sales surged more than 5%. Moreover, a gauge of business prices, the producer price index, rose at a record rate of 1.3%, while industrial production jumped 0.9% which was nearly two times stronger than expected. But caution descended anew on the dollar ahead of news on weekly jobless claims which are forecast to remain at elevated levels around 765,000, above the pre-pandemic peak of 695,000.


The euro rose for the first time in three days against its U.S. rival, though it remained in a shallow hole for the week. Dramatically strong U.S. data this week reopened a recent wound for the single currency: Signs of America’s recovery from the pandemic outpacing Europe. Still, the unevenness of the U.S. rebound has resulted in more two-day FX traffic this year, helping to limit both bouts of dollar strength and weakness.


Canada’s dollar strengthened on the back of oil making new highs above $62, a rise that gained added traction from greenback softness ahead of U.S. jobs data. The gain Thursday kept alive the loonie’s two weeks and counting winning streak against its southern rival. Yet another streak was seen at risk of ending Friday, as retail sales are forecast to fall for the first time in eight months when consumer spending likely contracted around 2.5% in December.


The U.S. economy surprised again but to the downside as weekly jobless claims veered the wrong way, jumping to 861,000 in the latest period from a downgraded 848,000 the prior period. More disheartening news on the job market cast doubt on the sustainability of the big bounce in consumer spending. A weak job market also validates the Fed’s no end in sight outlook for its dollar-negative accommodative stance. Dollar weakness could be checked by better than expected news on the Philly Fed index and evidence of rising inflation as import prices jumped by a bigger than expected 1.4% in January following an upwardly revised gain of 1% in December.


Falls in the pound giving way to renewed buying is a clear sign of bullish underlying sentiment. A day after it shed half a cent against the greenback, the pound charged to fresh peaks, its strongest in nearly 3 years. Sterling is now within a hair’s breadth of a key psychological top that it could soon break, depending on how data fare from both sides of the Atlantic over the balance of the week. British consumer spending Friday is forecast to plunge by 2.5% in January due to extended lockdowns to curb the spread of the virus.

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