Currency Market Analysis

Jul 28, 2021 | Currency Market Analysis

Global Themes

Major currencies were largely steady with a Fed policy decision hours away. The dollar regained some poise after it slipped the previous day to mid-July lows. The buck encountered some pre-Fed and month-end profit-taking after it soared about 4% since late May. Market attention today is on the Fed’s 2 p.m. ET decision and press briefing by Chair Jerome Powell 30 minutes later. The Fed is not expected to change course on policy just yet given the economic crosscurrents of a hazier outlook for growth as the coronavirus gains steam. Key for the dollar will be whether the Fed has seen the economy make material progress since officials met last month. Since then the economy added a massive 850,000 jobs in June, the same month that inflation clocked a 2008 high of 5.4%. A hawkish hold where the Fed plays up economic progress would set the stage for policy tapering later this year, a scenario that could buoy the dollar.

GBP

The UK pound was broadly steady as tepid risk sentiment was offset by better news on the local virus situation. The case count in Britain has reportedly moderated, allaying fears that cases could rise as Britain last week rolled back most restrictions. Constructive news on the pandemic, if sustained, could allow the Bank of England, which meets next week, to drop pound-positive hawkish hints on the outlook for monetary policy.

EUR

The euro receded from mid-July highs, a bounce spurred by short covering ahead of a Fed decision and month-end. The euro would be vulnerable if the Fed’s statement strikes a hawkish tone that puts a policy taper in play in the months ahead. The euro’s summer decline stems in part from the divergent outlook for monetary policy with the ECB not expected to shift from ultra-low rate policy until after the Fed.

CAD

The Canadian dollar firmed in pre-Fed trade, boosted by higher oil and elevated domestic inflation. Canada’s annual rate of inflation slowed to a still elevated 3.1% pace in June, down from May’s 10-year high of 3.6%. A core measure of inflation that the Bank of Canada closely monitors unexpectedly softened to 1.7% versus forecasts of an uptick to 1.9% from 1.8% last time. The data was consistent with Ottawa’s view that higher inflation should fade toward bankers’ 2% goal over coming months. A 0.7% jump in oil lifted prices above $72.


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