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Currency Market Analysis

Jun 02, 2021 | Currency Market Analysis

Global Themes

USD

The US dollar has bounced off multi-month and, in some cases, multi-year lows against numerous currency peers following a pick-up in US manufacturing data. US non-farm payrolls data is released on Friday and is considered a major event for currency markets given the US Federal Reserve (Fed) is basing tightening monetary policy on full employment. An acceleration of vaccines and strong inflation signals outside of the US have weighed heavily on the dollar of late. Historically, a perceived strong global economic recovery has weakened the counter-cyclical dollar, but if actual US inflation rates soar and remain high, this could boost demand for the world’s reserve currency. Focus shifts to the US jobs report at the end of the week for more directional cues for the dollar, but overall risk appetite remains elevated, which often weighs on the safe haven buck. Meanwhile, oil prices surged to multi-year highs yesterday, which has boosted demand for the Canadian dollar.

GBP

After spiking to fresh 3-year highs yesterday, GBP/USD has since retreated over one cent. Sterling was the best performing G-10 currency last month and closed May out at the highest closing monthly price versus the US dollar since the EU referendum in 2016. Has it reached its peak? GBP/USD dropped to 35-year lows last March, near $1.14, but is currently trading around 25% higher and closed above its 100-month moving average last month for the first time since 2014. These are bullish signals and the sharp uptrend is still in play with eyes on the $1.43-$1.44 area as the next upside target. However, the pound could face headwinds, especially if the UK government delays its full reopening of the economy due to Covid-19 concerns. From a technical viewpoint, investors are eyeing a potential short-term correction lower, particularly if GBP/USD ends the day lower today. The other consideration is that positioning data shows traders increased their GBP longs (turning more positive on the pound), but despite this optimism it also increases the risk of a retracement lower if these positions are unwound.

EUR

For the first time in two years, Eurozone inflation rose to 2% in May, surpassing the European Central Bank’s (ECB) target and complicating the central bank’s decision next week on whether to maintain its ultra-loose monetary policy.  The increase in inflation is the hot topic driving market sentiment and is likely to fuel investors’ nervousness that central banks will scale back monetary stimulus sooner than expected. The jump in Eurozone inflation from 1.6% in April followed an even sharper acceleration of consumer price growth in the US, which recently hit 4.2%. If inflation persists and isn’t transitory as expected, we could see enhanced currency volatility as traders bet on which central banks will tighten policy first.


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