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Currency Market Analysis

Mar 17, 2021 | Currency Market Analysis

Global Themes

Treasury yields and the U.S. dollar glided higher ahead of today’s critical policy decision from the Federal Reserve. The mostly stronger greenback was near highs for the week against the euro and yen, while Canada’s dollar hovered just below three-year peaks. America’s benchmark 10-year Treasury note climbed to fresh pandemic highs of 1.66% in the runup to the Fed’s 2 p.m. ET announcement when the central bank also will publish new forecasts for the economy and indicate when it could raise interest rates from crisis lows. The Fed last issued economic forecasts in mid-December and since then Washington has approved a total of around $2.8 trillion in new economy-boosting fiscal stimulus. Fed forecasts that should meaningfully upgrade its economic outlook and pencil in a sooner liftoff in interest rates could keep upward pressure on both yields and the dollar.  


USDCAD edged above three-year lows ahead of the Fed decision and after data showed a smaller than expected increase in Canada’s cost of living. Consumer prices ticked up to a 1.1% annual rate in February which undershot forecasts of 1.3%. The common, or core, reading that’s considered the Bank of Canada’s inflation yardstick steadied at 1.3%, a notch below forecasts of 1.4%, and south of the central bank’s 2% goal. Tame inflation could lessen the likelihood of the BOC scaling down its economy-boosting weekly bond purchases as soon as next month, a scenario seen as somewhat loonie-negative.


The euro neared a one-week low against the dollar on the perception that the Fed today may come across less dovish in its coming guidance for the economy and interest rates. The euro tends to have a heightened sensitivity to anything that highlights economic and monetary policy divergence between Europe and the U.S. EURUSD has slipped into the red against the dollar for the week and could potentially be vulnerable to revisiting lows for the year it hit last week, should a more upbeat Fed buoy the greenback.


Central bank caution over the next 24 hours kept sterling on generally level ground against its U.S. counterpart. The tone of the Fed’s statement and economic forecasts will be important for GBPUSD with any further lift in Treasury yields seen as supportive of the greenback. After the Fed’s 2 p.m. ET decision, attention will shift to the Bank of England’s policy announcement Thursday at 8 a.m. ET. The BOE is expected to maintain rock bottom interest rates just above zero. Key for the pound while be whether the central bank sounds more upbeat about the economic outlook than cautious about near term growth prospects.

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