Currency Market Analysis
Apr 26, 2021 | Currency Market Analysis
The U.S. dollar sagged to new lows with America’s dovish central bank headlining a very busy week. The buck fell to one- and two-month lows against the Canadian dollar and euro, respectively, while it also was weaker against the yen and sterling. The Fed takes center stage with a midweek policy decision when it is expected to keep interest rates at rock bottom levels. Key for the dollar will be whether the Fed’s statement acknowledges a booming economy and sounds amenable to rolling back emergency stimulus somewhat sooner. The tone of the Fed’s statement and press briefing by Chairman Powell will be paramount for currencies. While the Fed may not help the dollar, U.S. data this week, if strong, could. Numbers on consumer confidence (Tuesday), first quarter growth (Thursday) and the Fed’s main gauge of inflation (Friday) are all forecast to strengthen.
The dollar index kept above its lows despite weaker than expected data. Durable goods rose 0.5% in March which was below forecasts of a 2.3% increase. The subcomponent on business spending also underwhelmed with a 0.9% increase compared to forecasts of 1.5%. Market sights are set on the Fed and U.S. data this week on consumer confidence, Q1 GDP, and the Fed’s main inflation yardstick, the core PCE price index which is forecast to rise 1.8% in March from 1.4% in February.
Sterling was mostly steady as a busy week across the pond tempered FX activity. A quiet week for the UK economy puts the focus on a raft of U.S. events like a midweek Fed decision. The pound has largely kept to the middle of a two-cent range against the dollar, one that could see some testing this week. While a status quo dovish message from the Fed may not help the dollar, evidence of the U.S. economy gaining substantial strength could set the stage for America’s central bank to telegraph policy changes as soon as its next meeting in mid-June.
Canada’s dollar strengthened to more than one-month highs against the greenback, boosted by central bank policy divergence in Canada’s favor. The loonie rose despite weaker oil markets with crude down about 2% around $61. After the Bank of Canada last week reduced its emergency support to the economy, the Fed on Wednesday is expected maintain its dovish policy settings to boost still high unemployment and still low inflation. Canada issues retail sales Wednesday and February growth Friday.
The euro eased off two-month highs against the dollar after a survey of German business confidence underwhelmed. Germany’s influential Ifo index inched up to 96.8 in April, below forecasts of 97.8 and March’s 96.6. The survey was enough to slow EUR/USD’s 3% advance in April. Europe’s biggest economy is still on track for a stronger recovery from the pandemic over the second half of the year.
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