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Currency Market Analysis

May 14, 2021 | Currency Market Analysis

Global Themes

A two-day rally in the U.S. dollar faded as worries about higher inflation subsided. The dollar slipped from one-week and one-month highs against the euro and yen respectively, and fell against rivals from Britain and Canada. While weaker Friday, the dollar was still on track for a weekly advance as it retained part of a rally that was fueled by the highest U.S. consumer inflation in more than a decade. Higher prices, if sustained, could spur the Fed to abandon its dovish, low interest rate posture. But worries about inflation receded Friday, coaxing Treasurys yields and the dollar downward, as commodity prices cooled while the Fed maintained a consistent low rate message. Still, investors will keep a wary eye on inflation developments and data today on U.S. retail sales.


Sterling ebbed but mostly flowed this week against the dollar with the UK unit on track for a second straight weekly gain. The pound’s ability to bend but not break below key psychological support against the dollar, coupled with news of better than expected UK growth this week, gave it the upper hand against its U.S. counterpart. Britain next week issues influential numbers on unemployment Tuesday, seen steadying at 4.9%, and inflation Wednesday that’s forecast to jump 1.4% in April from 0.7% in March. Signs of a strengthening UK economy tend to prove pound-positive.


The euro erased losses against the dollar stemming from a red-hot reading of U.S. inflation that momentarily injected uncertainty into the Fed’s low rate outlook. The euro also benefited from Wall Street storming back Thursday after a significant three-day slide that fanned appetite for risk at the greenback’s expense. Next week will put a spotlight on the pace of Europe’s recovery from the pandemic with preliminary factory surveys on May 21.


The U.S. dollar pared more of its weekly gain Friday after disappointing news on America’s main growth engine, the consumer, added more evidence of an uneven recovery. U.S. retail sales unexpectedly flatlined with a zero reading for April, below forecasts of a 1% increase, though the prior number proved even stronger (+10.7%). Tepid data serves as a strong vote of confidence in the Fed’s low rate outlook, a dovish stance and a key vulnerability for the dollar.


Stronger oil and a weaker dollar boosted the commodity-backed Canadian dollar. While below the six-year high it crested this week, the loonie maintained a winning streak that had it in line for its seventh straight weekly advance. Adding to Canadian recovery optimism, numbers today on manufacturing sales and wholesale trade posted solid growth, buoying the loonie. Canada next week issues consumer inflation Wednesday and retail sales Friday.  

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