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Currency Market Analysis

Jul 22, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar eased off multimonth highs amid a recovery in risk sentiment. The greenback was little changed against the euro and yen while rivals from Britain and Canada bounced back from five-month lows. Investor optimism regained the upper hand as central banks return to the fore and U.S. jobs data are forecast to show continued progress. Still, sentiment continues to sway between pessimism that variants of the coronavirus could slow the recovery and optimism that economic fundamentals remain very robust. The euro zigzagged after the European Central Bank kept policy unchanged and tweaked its forward guidance in a way that suggested cheap credit policies would remain in place for longer. Expectations that the Fed next week would keep American monetary stimulus on full blast also bolstered risk sentiment. U.S. weekly jobless claims today are expected to improve to a new pandemic low of 350,000.


Sterling found a floor and a helping hand from markets’ improved tolerance for risk. Risk appetite returned as investors set their gaze on the world’s biggest central banks (i.e. the Fed and ECB) who are likely to renew their promise to maintain cheap credit policies for the foreseeable future. The pound also found support from UK data that showed a smaller than expected slowdown in factory orders in July from June’s blistering pace which was the fastest since 1988.


The euro was on choppy ground after the ECB left policy unchanged while its new forward guidance suggested any tapering of stimulus was on a further horizon. The 19-nation central bank earlier this month adopted a slightly higher inflation goal of 2% over the medium term. The central bank said that inflation could top its symmetric 2% goal over the short run. Still, it believes that inflation was running “well below” its new goal over the medium term. The overall message from the ECB today is that higher rate policy is off the table for even longer, a backdrop seen as euro-negative.


The U.S. dollar was broadly flat as a dovish ECB policy decision largely offset disappointing news on America’s job market. Weekly jobless claims unexpectedly rose in the latest period, climbing by more than 50,000 to 419,000. The data, while volatile, underscored the Fed’s aim to see the labor market make substantial progress before it eases off the monetary accelerator. The dollar on balance remains well supported as risk sentiment sways from pessimism over the virus to optimism about still robust U.S. growth.


A wild week for the loonie saw the Canadian unit recover from February lows to reach its highest in about a week. Upticks in risk sentiment and oil markets helped stop the bleeding for the loonie which at one point this week erased its gain for the year. The price of oil held above $70, a marked rebound from $65, an 8-week low, earlier this week. Whether the loonie can end the week with a gain could hinge on Canadian consumer spending Friday with forecasts of a second straight monthly decline in May.

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