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Currency Market Analysis

Jun 16, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar was camped near one-month highs ahead of a Fed policy decision today at 2 p.m. ET. The dollar was little changed against the euro and Canadian dollar but slipped versus the inflation-boosted UK pound. The Fed is hours away from issuing a statement and fresh forecasts for the economy and interest rates. The buck has found support lately from higher inflation which gives the Fed cover to at least talk about when it should dial back on monetary stimulus. The Fed is widely expected to keep interest rates near zero and continue to spend $120 billion a month in bond purchase to boost spending and borrowing. Dollar gains could evaporate if the Fed maintains that higher inflation isn’t a threat to the recovery. The dollar, on the other hand, could add to its gains if the Fed should significantly upgrade its outlook for the economy and pull forward rate hike expectations.


The euro stuck close to its lowest level in a month against the greenback. More range trading could be in the cards for EUR/USD if the Fed should reassure markets that higher U.S. inflation isn’t likely to undercut the economic recovery. But if the Fed should sound more hawkish than dovish with respect to the outlooks for the economy and lending rates, EUR/USD would be at risk of testing new multiweek lows.


Sterling bounced above one-month lows against the dollar thanks to hotter than expected UK inflation. Inflation jumped above the Bank of England’s 2% bullseye in May, when consumers prices accelerated at a 2.1% annual rate after a 1.5% increase in April. While above the BOE’s goal for the first time since mid-2019, the stronger pound, one of the year’s best performing major currencies, is seen exerting downward pressure on inflation and thus should not require a price strangling rate hike any time soon.


The loonie held above its lowest level in more than a month against its U.S. peer after area inflation exceeded forecasts. Canadian consumer prices rose at a 3.6% annual rate in May which was a tick warmer than expected to two ticks above April’s 3.4% spike, the highest in a decade. But a gauge of core inflation that the Bank of Canada watches closely to influence its policy decisions kept below its 2% goal, at 1.8%. Today’s data on balance keeps the BOC on a tapering path, a key pillar of loonie strength.

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