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Currency Market Analysis

Aug 11, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar held firm near highs for the year ahead of important inflation data. Sterling fell to two-week lows with the euro inching closer to 2021 lows. Canada’s dollar was steady as softer oil was offset by optimism after the U.S. Senate passed a $1 trillion infrastructure deal. At four-month highs, the dollar index is on the cusp of 2021 peaks as the outlook for Fed policy normalization has trended forward. Economic optimism is on the rise after America netted nearly 1 million jobs for a second straight month. The economy and Fed officials seem to be prepping markets for a reduction in stimulus. How soon the Fed acts may hinge on U.S. inflation for July. Forecasts call for annual inflation to tick down to a still high 5.3% in July. Elevated inflation would keep the door open for the Fed to announce plans to reduce stimulus as soon as September.


The test of strength that U.S. inflation posed to the dollar resulted in mixed marks for the greenback. On the one hand, headline inflation remained high at a 5.4% rate in July, which held at a 2008 high. But on the other hand less volatile core inflation cooled as expected to a still elevated 4.3%, a few ticks south of June’s 4.5% jump, the highest since 1991. Nascent signs of inflation at or near a peak won’t add to already elevated pressure on the Fed to dial back on stimulus, something dollar bulls were hoping for.


Sterling fell to two-week lows against the outperforming greenback. Risk sentiment, a key driver of sterling, wavered after Wall Street rolled to record highs. Demand for sterling abated on caution ahead of UK growth numbers Thursday. Meanwhile, the dollar is increasingly in vogue as the U.S. economy bounces back, albeit in fits and starts, and the Fed seems on smoother and perhaps shorter path to paring back stimulus. Forecasts suggest Britain’s economy jumped 4.8% during the second quarter after it fell 1.6% in Q1.


Canada’s dollar rebounded from two-week lows as slower, though still high, U.S. inflation put a brake on the greenback. The loonie was still seen on choppy terrain as oil prices moderated with crude below Tuesday’s close above $68.


The euro fell to new four-month lows, a dip that put it on the doorstep of 2021 lows. Europe perceived on a longer road to recovery from the pandemic recession is mostly behind the euro’s slide this year. Highlighting economic divergence that has weighed on the euro and boosted the U.S. dollar, American hiring has accelerated over the last three months while German investor confidence deteriorated for a third straight month in August.

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