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Currency Market Analysis

Feb 25, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar index fell to its lowest level in seven weeks ahead of data that could underscore the Fed’s low rate assurance. The buck fared mixed but mostly weaker as it hit seven-week lows against the euro while it dangled at or near three-year lows against peers from Britain, Canada and Australia. The otherwise weaker dollar outperformed against the yen and Swiss franc, currencies that succumbed to U.S. Treasury yields ripping higher. The Fed chair doubling down on ultra-low rate guidance to lift low inflation and suppress high unemployment has led some dollar bears to pull out their 2020 playbooks. The greenback shed nearly 7% last year, its weakest performance in three years, as unprecedented stimulus from policymakers sketched a brighter outlook for growth. How much scope the dollar has to the downside may hinge on data today on weekly jobless claims and inflation figures Friday.

USD

The dollar shrugged off a relatively solid set of U.S. data as the Fed’s low rate guidance remained the dominant driver. Weekly jobless claims improved more than expected, falling to a November low of 730,000 versus forecast of 838,000. U.S. fourth quarter growth enjoyed a one-tick upgrade to an annual rate of 4.1%. Durable goods soared by 3.4% in January, a jump nearly quadruple expectations. Come Friday, the Fed’s main inflation yardstick is forecast to moderate to 1.4% from 1.5%, a decline that if realized would corroborate with the Fed’s pledge to maintain rock bottom rates for the foreseeable future.

GBP

Broad-based euro outperformed weighed on sterling, allowing GBPUSD steady below April 2018 peaks reached 24 hours ago. The pound’s runaway rally this year threatens to put a cloud over Britain’s otherwise brighter economic outlook. Meaningful currency appreciation can act as a de facto interest rate hike by slowing the economy. GBPUSD has strengthened around 7.5% over the last six months, an increase that dulls the competitiveness of U.K. exports.

EUR

The greenback’s broad decline boosted the euro to its highest in seven weeks. Europe’s common currency also caught a lift from another upside surprise in area sentiment. On the heels of German business optimism rising to four-month highs in February, a survey of euro zone economic sentiment topped forecasts with a print of 93.4 for this month. The euro’s pop Thursday means that EURUSD is now on neutral ground for the year. Gains for the euro may be tough to sustain in the face of rising U.S. Treasury yields.

CAD

Global optimism and oil rising to new highs around $63 propelled the commodity-linked Canadian dollar to three-year peaks. Vaccines rollouts, Washington pledging more fiscal relief, and the Fed staying the low rate course have boosted prospects for global growth this year. The loonie stands to gain given its close ties to the world economy. Barring a downward correction in oil, the path of least resistance appears higher for the loonie.


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