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Currency Market Analysis

Apr 13, 2021 | Currency Market Analysis

Global Themes

Across the board gains Tuesday lifted the U.S. dollar above multiweek lows. The dollar firmed against the euro, sterling and loonie ahead of fresh figures today on U.S. inflation, a key driver of Fed policy. Expectations of a higher cost of living nudged Treasury yields higher with the 10-year around 1.68%. Forecasts call for consumer prices to rise at an annual rate of 2.5% in March after a 1.7% increase in February. The Fed has forecast a temporary rise in inflation over coming months that it sees abating toward year-end. Inflation is literally a hot topic for markets as it speaks to the outlook for Fed policy. Sterling nursed a decline after Britain posted a smaller than expected rebound in growth after the economy’s worst year in three centuries.


The loonie hit a Thursday low against the greenback which firmed ahead of key U.S. inflation figures. Firmer oil above $60 kept loonie losses in check, however, with USDCAD sticking to recent ranges. Domestic Covid developments have weighed on the loonie by casting doubt in the Bank of Canada scaling back stimulus as soon as next week.


Sterling weakened after Britain’s economy made a lackluster rebound following its worst performance in 300 years in 2020. The U.K. economy grew 0.4% in February versus forecasts of 0.6% and followed January’s drop of 2.2%. While the growth data slightly underwhelmed, the economic outlook brightened as Britain this week reemerged from lockdown which sets the stage for a material recovery in the months ahead.


The euro fell from multiweek highs against the dollar after data showed a surprise decline in German confidence. Germany’s ZEW survey of investor optimism unexpectedly fell (to 70.7 vs forecasts of 79.0 from 76.6 in March) and for the first time since November, as the latest lockdown to stem the spread of the coronavirus spurred growth fears in the bloc’s biggest economy. 


The dollar wavered after inflation rose but not by enough to alter the Fed’s low rate outlook. Consumer prices were up by 0.6% for the month of March, the fastest in 8 ½ years, and accelerated at a 2.6% rate over the year. Annual core inflation rose to 1.6% from 1.3%, keeping below the Fed’s average goal of 2%. The yield on the 10-year Treasury declined to 1.66% from 1.68% before the data, a sign of broad conviction in the view of higher inflation ultimately proving temporary.

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