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Currency Market Analysis

Jun 25, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar was a touch softer as Washington’s bipartisan deal on infrastructure spending bolstered confidence in the global recovery. The buck slipped against the euro and Canadian dollar, but held firm against the UK pound. Mexico’s shock interest rate hike Thursday continued to buoy the peso which hovered around two-week peaks. Confidence in the global economic outlook brightened after Washington agreed on a bipartisan infrastructure speeding deal of nearly $1 trillion. But inflation worries remained near the surface ahead of new data today. Forecasts call for the hottest underlying inflation in decades with prices seen rising nearly 3.5% in May. Ahead of the data, the dollar was on track for its first down week of the month, declines it could potentially pare if inflation should race ahead of expectations and put the focus on the more hawkish outlook for Fed policy.


The euro bounced back this week, helped in part by area data showing the strongest business growth in 15 years. Yet while stronger for the week, the euro was about 2% weaker against the dollar this month, declines spurred by the view that the Fed would reduce monetary stimulus ahead of the ECB. The euro bloc next week releases top tier numbers on inflation on Wednesday and unemployment Thursday.  


The dollar fell to session lows after U.S. data put a tighter lid on bond yields. The Fed’s main gauge of inflation rose in line with expectations, rising at an annual rate of 3.4% in May from 3.1% in April. Consumer spending unexpectedly stalled, though it helped that April spending enjoyed a solid upgrade to a gain of nearly 1%. Personal income contracted but at a slower than expected pace of 2%. The data was consistent with the economy recovering in fits and starts which is seen allowing the Fed to proceed patiently in paring back stimulus.  


Sterling fell Friday but was poised to cross the week’s finish line ahead of the greenback. The pound remained subdued a day after the Bank of England revised up its forecast for growth but signaled a wait and see stance with respect to monetary policy. Some expected more of a hawkish hold from the BOE this week after the Fed decision last week. Somewhat justifying the BOE’s more cautious outlook, data next week (Wed, Jun 30) is forecast to confirm the UK economy contracted 1.5% during the first quarter.


The peso scored two-week highs a day after Mexico’s shock interest rate hike to 4.25% from 4%. Policymakers narrowly voted (3-2) for the first rate hike since 2018 after preliminary June inflation exceeded 6%, or double the central bank’s 3% goal. Mexico forecast that it would be more than a year before inflation receded to its goal, suggesting borrowing rates may need to rise further in the months ahead.


The Canadian dollar was on pace for a winning week following mixed data from south of the border. The weaker greenback helped oil pare earlier declines which underpinned commodity currencies. U.S. consumer spending unexpectedly stalled in May, causing the greenback to surrender more of its Fed-fueled gains. While core American inflation rose at an annual rate of 3.4%, it was in line with expectations and so far hasn’t spoked bond markets which remain well-behaved with the yield on the 10-year below 1.50%.  

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