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Currency Market Analysis

Aug 12, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar stabilized after an inflation-inspired decline the previous day. The firmer buck edged higher against rivals from Europe, Japan and Canada. The dollar’s summer rally to four-month highs cooled Wednesday after slower U.S. inflation suggested a somewhat lower likelihood of the Fed cutting back on stimulus anytime soon. Monthly data showed consumer prices slowed to a 0.5% increase in July, the slowest in five months, while the drop from 0.9% in June was the biggest in 15 months. July inflation was a vote of confidence in higher prices proving temporary. Still, historically high inflation suggested the Fed has met one of its two goals for shifting away from rock-bottom interest rates. The Fed’s other goal of maximizing the job market’s health will be in focus today. Weekly jobless claims are forecast to fall further below 400,000.


The euro steadied above four-month lows but remained in a hole for the week against the greenback. European economic fundamentals remained a headwind on Europe’s single currency. A report today showed a bigger than expected decline of 0.3% in euro zone industrial production in June while the number for May saw a downward revision. Poor underlying sentiment suggests fairly short-lived bouts of strength for the euro.


The Canadian dollar was little changed as softer oil was largely offset by solid risk sentiment after Wall Street notched new all-time highs this week. A lack of much domestic data this week has put the main focus for the loonie on broader risk sentiment. Canada’s economic calendar picks up next week with top-tier numbers on consumer inflation (Aug 18) and retail spending (Aug 20).


The U.S. dollar held near the top of a tight overnight range as fresh data renewed pressure on the Fed to shift away from low rate policy. Weekly jobless claims improved as expected to 375,000 in the latest period, and kept below 400,000 for a third straight week. Meanwhile, wholesale inflation proved higher and hotter than expected, readings that strengthened the debate for the Fed to dial back on stimulus. Producer prices soared at a monthly rate of 1% and an annual rate of 7.8% in July, which blew past forecasts of 0.6% and 7.8%, respectively. A strengthening job market and historically high inflation is a recipe for a stronger dollar.


Sterling fell after mostly in line with expectation UK growth wasn’t seen as altering the steady outlook for Bank of England interest rates. As expected, Britain’s economy hit the accelerator and grew at a quarterly rate of 4.8% in the second quarter as it rebounded from a 1.6% contraction in Q1. And while industrial output surprised to the upside in June, it came with downward revisions to the previous month.

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