Currency Market Analysis

Jun 01, 2021 | Currency Market Analysis

Global Themes

The Canadian dollar rose toward six-year highs as oil jumped to 2021 peaks above $68. The coming week will shed important light on the health of the economy ahead of the Bank of Canada’s policy decision on Jun 9. Data today is forecast to show Canada’s economy grew at an annualized rate of 6.7% during the first quarter after a 9.6% pace during the final three months of 2020. Forecasts for Friday’s May employment report suggest the economy bled 20,000 jobs with unemployment seen ticking up to 8.2%.

GBP

During the Asian session this morning, GBP/USD peaked at a 3-year high. A combination of thinned liquidity and renewed sentiment of dollar weakness allowed the pair to make such headway. As such, this recent move keeps GBP/USD on track for potential new highs in the short term.

One of the main drivers for Sterling’s recent positive run is that the Bank of England (BOE) has flipped the narrative ever so slightly with more hawkish tones in recent comments. Last Thursday, BOE member Gertjan Vlieghe indicated that the central bank was likely to raise interest rates well into next year but the bank would be willing to move earlier, providing the economic data supported such a move. Committing to a deadline will have helped cement traders’ expectations around policy amendments. Despite such a positive sign from the central bank, concerns remain over whether the UK economy will be able to fully re-open as planned.

GBP/EUR sits in a tight trading range since the surge seen last Thursday. The currency pair hovers around the €1.1630 mark this morning after peaking out at €1.1661 last Friday. EUR/USD seems to be limiting how high GBP/EUR can push currently as more focus seems to be surrounding selling any dollar positions.

USD

The US Dollar index surrendered the 90 handle this morning during the Asian session. Easing inflation fears in the US may allow the Federal Reserve (Fed) to delay the need to tighten policy as quick as other major central banks. As a result EUR/USD perches comfortably above the $1.22 handle this morning.

Over the past quarter both traders and investors have been confident that economies rebounding from the COVID lock down would see price pressures which would prompt action from their respective central banks, with the Fed being the focus. However, core CPI, a measure of the price changes which exclude some of the more extreme price changes, show that the US has no inflation problem which if proven to be the case will weigh heavily on the dollar and could see the dollar crosses benefit from the further weakening (source: Reuters).

EUR/USD is now expected to continue its push higher with forecasts for $1.24 by the end of this month and $1.32 by the middle of next year (source: Reuters). With the dollar a counter cyclical currency - as long as the world economy continues to recover this will inevitably be bad for the US Dollar.


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