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Currency Market Analysis

Jul 27, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar didn’t stray far on the eve of a policy announcement from the Federal Reserve. The buck enjoyed general support that buoyed it versus the euro, sterling and Canadian dollar. But weaker global equities supported safe peers from Japan and Switzerland. The market today is biding its time ahead of tomorrow’s decision from the Fed. The Fed is likely to discuss policy changes but not delivery any just yet. Key for the dollar will be whether the Fed signals that it’s a big step closer to tapering stimulus before year-end. A hawkish, inflation-watching tone would suggest an announcement to taper policy might happen before the end of the third quarter, a scenario that could add legs to the dollar’s summer rally.

CAD

Canada’s dollar softened Tuesday but was little changed for the week, weighed down by subdued risk sentiment. Wall Street futures suggested equites may pullback from all-time highs. Oil markets were broadly flat with prices below $72. Canada issues consumer inflation Wednesday that’s forecast to moderate to a still-elevated 3.2% annual rate in June compared to May’s decade high of 3.6%. The longer inflation holds above the Bank of Canada’s 2% goal, the more likely the central bank would be to retire its bond buying program as soon as year-end.

EUR

The euro moved in and out of positive territory against the dollar ahead of a policy decision by the Fed on Wednesday. This week’s economic update from America’s central bank is likely to hint at how much downside risk faces the euro. A hawkish statement that suggests a taper decision could come by August or September could leave the euro vulnerable to testing fresh lows. Any policy tapering by the ECB is expected to lag behind the Fed, a more dovish outlook that has depressed the euro.

GBP

Weaker global equities guided sterling lower against the greenback. The market is largely biding its time ahead of a midweek policy update from the Fed. For sterling to keep its chin above five-month lows, the Fed would have to moderate its optimism about the economy which would suggest a later rather than sooner timeframe for the central bank to taper stimulus.

USD

The U.S. dollar pared gains after weaker than expected data. Durable goods orders rose 0.8% in June, below forecasts of a 2.1% increase. The accompanying gauge of business spending also trailed forecasts by rising 0.5% for a second straight month. On balance, the data suggested that second quarter growth, due Thursday, could be on the soft side of expectations. Forecasts suggest the world’s biggest economy grew at a blistering pace of 8.6% in the April-June quarter after it expanded at a robust 6.4% rate in Q1.


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