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Currency Market Analysis

Jul 16, 2021 | Currency Market Analysis

Global Themes

Solid U.S. data and a rising strain of the coronavirus buoyed the U.S. dollar Friday and had it on course for its best week in a month. Dollar strength kept it well supported and near multimonth highs versus the euro, sterling and Canadian dollar. The Fed continues to brush off the highest U.S. inflation and more than a decade. Still, the U.S. economy is making big gains with jobless claims running at 16-month lows, a trend that bolsters the Fed’s forecast of an earlier shift away from low rate policy. The world’s biggest economy will hog the spotlight today with a report out on June retail spending. Overall spending likely sagged for a second straight month, though largely due to scarce auto parts stemming from supply chain disruptions.


Pinned near the bottom of its range, the UK pound was down about 0.5% versus the dollar this week, putting it at risk of its worst performance in a month. The pound caught a momentary boost this week after some Bank of England officials voiced support for an earlier curtailment of stimulus measures with inflation running that the highest level (2.5%) in almost three years. But the pound sputtered against the greenback which enjoyed dual tailwinds from haven flows stemming from the Delta variant dampening global recovery optimism, and signs of America’s job market making substantial progress.


The euro limped to the week’s finish line as it stuck around its lowest level in three months versus the greenback. Data Friday gave the ECB a green light to maintain rock-bottom interest rates as inflation kept below the central bank’s new 2% goal. The ECB will dominate center stage next week when it delivers a policy update on July 22. The central bank has promised to soon deliver new policy guidance that, if dovish and consistent with low rates for longer, could intensify downward pressure on the euro.


A surprise jump in consumer spending boosted the U.S. dollar, keeping it on course for its best week in a month. Retail sales jumped 0.6% in June, wrongfooting forecasts of a 0.4% decline. The data was consistent with the economy making substantial strides and cements expectations of very robust second quarter growth of around 10%. A backdrop of rising inflation, falling unemployment and a resilient consumer makes a compelling case for the Fed to unwind stimulus.  


The loonie steadied but hovered near three-month lows against its U.S. rival. The price of oil slipped to one-week lows below $72, a negative for Canada’s commodity-driven currency. While the Bank of Canada dialed back on stimulus this week, it largely met market expectations which left the loonie ripe for the classic ‘buy the rumor, sell the fact.’ Canadian data Friday were mixed as house starts accelerated more than expected, but wholesale trade disappointed.

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