Western Union Business Solution is rebranding into CONVERA Read more >

Currency Market Analysis

May 12, 2021 | Currency Market Analysis

Global Themes

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.

Get the daily currency market analysis in your Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.