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Currency Market Analysis

Feb 23, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar index stabilized after sinking overnight to mid-January lows. The firmer buck steadied after falling to four-week lows against the euro and its weakest in nearly three years versus the U.K. pound and Canadian dollar. The dollar’s defensive bias was catalyzed by last week’s disappointing jobless claims data that highlighted the weak state of the labor market. But dollar shunning abated ahead of key testimony today and tomorrow on Capitol Hill by Fed Chairman Jerome Powell. Inflation has become a hot topic and markets will parse every word from Mr. Powell. Should the Fed chief play down the recent rise in inflation expectations it could do little to support the dollar as it would signal full steam ahead for the central bank’s economy-boosting low rate policies. 


The loonie largely seesawed Tuesday near its strongest level since April 2018 against the greenback, boosted by oil notching fresh peaks above $60. The price of crude briefly reached $63, the highest since January 2020. Key for the loonie and overall risk sentiment today will be remarks from Fed boss Jay Powell. Any note of vigilance with respect to the inflation outlook could mean the Fed’s low-rate window is starting to close, a scenario that could support the greenback. Canada’s central bank chief, Tiff Macklem, also speaks today. 


Caution ahead of congressional testimony today by the Fed chief put a brake on the euro’s revival to four-week highs. The euro has been supported by divergent data which sprinkled cold water on the notion of U.S. economic outperformance over Europe. A pair of German sentiment surveys over the past week showed a bigger than expected improvement in investor and business confidence, numbers that stood in contrast to fresh signs of a struggling U.S. job market. 


Sterling’s rally to 34-month highs downshifted ahead of congressional testimony today and tomorrow on Capitol Hill by Fed chief Jay Powell. Meanwhile, vaccine optimism continued to overshadow the current weakened state of the U.K. economy. British unemployment rose for the sixth time in as many months in December, ticking up to 5.1% which met expectations. Britain’s jobless rate has jumped from 3.8% a year ago and it may be too soon to call a top just yet with government wage support expected to be tapered in the months ahead. 

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