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Currency Market Analysis

May 28, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar was spotted an early lead Friday ahead of fresh news on the state of American inflation. Across the board gains lifted the greenback to more than one-week highs against the euro. Sterling fell after a rally the previous day while an underperforming Canadian dollar put its multiweek winning streak at jeopardy. Recent worries about rising inflation have largely been put to bed as Fed officials play down the risk of a chronic price growth. Still, market confidence remains fragile and could easily waver anew if a reading today on the Fed’s preferred gauge of inflation should surprise to the upside. Forecasts call for the core PCE index to jump at a 2.9% annual rate in April, compared to the Fed’s 2% sweet spot, from 1.8% in March. An in line or below forecast reading of inflation would run the risk of undercutting the dollar’s pre-data bounce.


A weaker UK pound Friday had surrendered a chunk of the previous day’s gain but was still clinging to a narrow weekly advance which if realized would be its fourth straight against the dollar. Like the U.S., Britain will be closed Monday for a holiday. The UK next week issues a trio of purchasing managers’ indexes on manufacturing, services and construction activity.


The euro fell against the dollar ahead of influential U.S. inflation data that could shed light on when the Fed reduces policy support to the world’s biggest economy. The heightened focus on the U.S. economy eclipsed news that euro zone economic sentiment rose more than expected to 114.5 in May from an upgraded 110.5 in April. Downside risk for the euro could be exacerbated amid end of week position squaring ahead of America’s long Memorial Day holiday weekend.


The dollar was mostly stronger following a trifecta of reports the U.S. economy. A core reading of inflation at the Fed watches closely to shape policy decisions jumped more than expected to an annual rate of 3.1% in April, the highest level in more than a decade. Consumer spending rose 0.5% last month, meeting expectations, while the 13.1% plunge in personal income wasn’t quite as bad as expected. The market reaction so far has been muted. While inflation topped the Fed’s 2% goal, it needs to remain there before officials reduce stimulus. Consequently, support to the dollar from the data may prove limited.


Mixed commodity markets and a stronger dollar put the loonie’s 8-week winning streak in danger. The loonie has outperformed over recent months as generally solid domestic data bolstered conviction in Canada raising interest rates ahead of the Federal Reserve. Canada’s interest rate outlook will be driven next week by first quarter growth Tuesday and the nation’s May jobs report Friday. A second straight month of negative job growth could leave the loonie vulnerable.

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