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Currency Market Analysis

Jul 13, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar kept warm and in reach of multimonth highs ahead of data today that’s expected to show American inflation running hot. The mostly firmer dollar was camped near April highs against the euro, sterling and Canadian dollar. Broader markets were muted after Wall Street’s strong start to the week. U.S. consumer prices are expected to remain elevated but inch down from decade-plus highs. Consumer inflation is forecast to slow a tick to a still high 4.9% annual rate in June after prices soared 5% in May, the fastest pace since August 2008. The buck could show some sensitivity to the data as it speaks to the outlook for Fed policy. Slower inflation could restrain the buck while higher inflation could be its ticket higher.


The UK pound was subdued against the dollar as it largely shifted into wait and see mode ahead of important data from across the pond. British inflation Wednesday is forecast to inch up to 2.2% in June while unemployment the following day likely steadied around 4.7% in the three months to May. The pound has struggled of late as the surging delta strain of the virus has cast a shadow over the region’s otherwise bullish economic outlook.


The loonie fell after the greenback rallied on the back of hotter than expected U.S. inflation. The Bank of Canada may decide to taper its bond buying program as soon as tomorrow, but the Fed appears closer on its heels. U.S. inflation accelerated unexpectedly to an annual rate of nearly 5.5%, a faster pace that further increased pressure on the Fed to slow its aggressive support to the world’s biggest economy.


The euro kept toward the bottom of its range against the dollar ahead of U.S. inflation data that could reinforce the divergent outlooks for transatlantic central bank policy. The buck’s summer rally versus the euro partly stems from expectations that the ECB would lag behind the Fed in normalizing interest rates. Elevated U.S. inflation would bolster that conviction and potentially leave the euro at risk of revisiting three-month lows.


The U.S. dollar rose to session highs after hotter than expected inflation confirmed the Fed’s more hawkish bias. The Fed appears on a faster track to dialing back on stimulus after headline consumer prices rose at an annual rate of 5.4%, a new decade-plus high, compared to forecasts to slow to 4.9% from 5% in May. Treasury yields jumped by a several basis points with the 10-year around 1.38%, well above last week’s five-month lows of 1.25%. Inflation showing few signs of peaking heightens the stakes for the Fed chair’s congressional testimony on the economy over the next two days.

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