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Currency Market Analysis

May 25, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar index fell to January lows as stocks rose and Treasury yields declined. The mostly weaker greenback slipped against counterparts from Britain and Canada, and hit fresh four-month lows against the euro. U.S. inflation jitters going from a boil to a simmer have painted a steady picture of Fed policy. Moreover, Fed officials this week have hammered home the idea that higher inflation is not expected to persist to the point that it prompts the central bank to taper or moderate the pace of support to the economy. The yield on America’s benchmark 10-year Treasury note fell to two-week lows below 1.60%. While inflation worries have receded for now, investors will look to influential price data Friday for their next steer. Forecasts call for the core PCE index to jump more than a percentage point to a 2.9% annual rate in April.


Data showing a surprise deceleration in UK consumer spending kept sterling largely grounded against its rivals, including the sputtering greenback. The pound has lacked a catalyst to sustain a recent rally that had it on the cusp of 2021 highs against the dollar. While dollar weakness bodes well for the pound, a lack of meaningful UK numbers this week could limit scope for sterling strength.


The euro rose to fresh multimonth highs against the dollar amid an increasingly bullish outlook for the bloc’s biggest economy. Germany’s Ifo survey of business morale jumped more than expected to 99.2 in May, the highest in 2 years. The brightening outlook for growth overshadowed news that Germany’s economy contracted by a bigger than expected 1.8% during the January-March quarter. Accelerating vaccinations are key factor behind the bloc’s improving prospects with the Ifo Institute forecasting German growth of 2.6% in Q2 and 2.8% in Q3. 


The loonie hovered near but below six-year highs against the dollar as oil wavered after reaching one-week highs above $66. Canada’s currency, though, was less than a half cent from May 2015 highs as receding U.S. inflation fears kept prospects of the Fed tapering policy on a distant horizon. Still, the spotlight on U.S. inflation risk isn’t expected to meaningfully dim anytime soon, particularly with important inflation numbers due Friday. Any upside surprise could sound the inflation alarms, unsettle markets and boost the greenback.

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