Currency Market Analysis
May 12, 2021 | Currency Market Analysis
The beleaguered greenback rose above multimonth lows as markets walked on eggshells ahead of key U.S. inflation data. The euro and sterling edged off 2 ½ month highs while stronger oil above $66, a one-week high, kept the Canadian dollar near multiyear peaks. Unease over rising inflation has rattled Wall Street. Yet bond markets and the dollar have had a muted reaction since one data point isn’t likely to alter the Fed’s low rate outlook. Forecasts call for consumer inflation to rise at an annual rate of 3.6% in April which if realized would be the highest in nearly a decade after prices rose 2.6% in March. To allay pressure on the dollar, inflation would have to overshoot expectations. Slower than expected inflation would depict the economy and Fed in sync, a scenario that could increase downward pressure on the buck.
The dollar added to overnight gains after the hottest consumer prices in more than a decade stirred inflation jitters. Headline consumer prices rose at an annual rate of 4.2% in April, the highest since September 2008, compared to forecasts of 3.6% from 2.6% in March. Core inflation also surprised to the upside, rising at an annual rate of 3% from 1.6% in March. While a bit noisy, the extent of the overshoot in inflation validated market fears that inflation could be on a faster path higher, one that, if sustained, could prompt the Fed to reduce stimulus sooner.
U.S. event risk was enough to coax the euro down from 2 ½ month highs versus the dollar. The euro has capital zed on dollar weakness, outperformance that gained traction from European recovery optimism in the wake of data showing a bigger than expected bounce in German investor optimism in May. It also didn’t help the euro that data today showed a far smaller than expected increase in euro zone factory growth for March.
Stronger oil markets pushed the loonie to fresh September 2017 highs against the greenback. Crude topped $66 for the first time in a week, thanks to a 1% rally. The loonie pared gains though after hotter than expected U.S. consumer prices validated market worries about an unwelcome rise in inflation.
Sterling’s rally to 2 ½ month highs against the dollar slowed on caution ahead of a key reading on the U.S. economy. Downside for the pound appears limited after data showed the U.K. economy fared better than expected in the first quarter when it contracted 1.5%. The economy regained vigor toward the end of Q1 as a separate survey showed it advanced 2.1% for the month of March. The data on balance was consistent with the recovery gaining strength as lockdowns eased.
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