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Currency Market Analysis

Jul 14, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar eased off three-month highs in central bank-driven trade. The dollar taking a breather allowed the euro, sterling and Canadian dollar to stabilize after fresh bouts of weakness. Data this week showing the highest U.S. consumer inflation in 13 years buoyed the dollar by strengthening the case for the Fed to ease off the monetary gas pedal. Consumer inflation accelerated at a 5.4% annual rate in June, the highest since 2008, which wrongfooted forecasts of a decline inside of 5%. Meanwhile, a decidedly hawkish New Zealand central bank sent the kiwi dollar soaring above 2021 lows as its early exit from QE policy set the stage for an earlier rate hike. Sterling bounced back after the highest UK inflation in years bolstered the argument for the Bank of England to unwind low rate policies. The dollar will be all ears and potentially legs as Fed Chair Powell delivers economic testimony on Capitol Hill today and tomorrow.


The euro stabilized above fresh three-month lows as greenback buying cooled on caution ahead of remarks from Fed Chair Jerome Powell. Key for the dollar will be how confident Mr. Powell is that high inflation should abate over coming months. Any wavering in Mr. Powell’s resolute belief that inflation should soon start to moderate would be a signal that the central bank may be on a faster track to rolling back stimulus.


A kiwi dollar-led rally boosted commodity currencies, allowing the loonie to find a floor after a recent slide to 2 ½ month lows. While the loonie benefited from outperforming commodity cousins from Down Under, its coming prospects are likely tied to the Bank of Canada’s policy update today. The loonie could be in line for renewed outperformance of its own if the BOC tapers its bond buys and forecasts a brighter outlook for the Canadian economy.


The U.S. dollar stuck below three-month highs despite fresh signs of rising inflation. U.S. producer prices, a gauge of business prices at the wholesale level, soared at an annual rate of 7.3% in June, the highest since November 2010, above forecasts of 6.8% and May’s surge to 6.6%. Higher inflation will be a hot topic today on Capitol Hill when Fed Chair Powell testifies before a House committee. A Fed chair that should emphasize an uncertain outlook for inflation could help keep the dollar well supported and biased higher.


The UK pound jumped after area inflation rose further above the Bank of England’s 2% goal. British inflation rose at a 2.5% annual rate n June, the fastest in nearly three years, compared to forecasts to steady at 2.2%. The data tempered a recent rise in UK economic caution, particular after monthly growth last week underwhelmed.

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