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Currency Market Analysis

Aug 18, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar steadied near 2021 highs as its latest rise encountered familiar resistance. That allowed rivals from Europe, Canada and Australia to stabilize. Risk aversion held the upper hand as optimism in the global recovery was in shorter supply amid mounting signs of a slowing Chinese economy. Geopolitical risk in Afghanistan also capped risk taking, buoying safe harbors like the greenback. The dollar has gained ground this week as prospects for the Fed to taper stimulus take shape. The Fed could be a strong monthly jobs report away from announcing plans to reduce stimulus. While less stimulus would be positive for the dollar, the greenback has struggled to crack through stiff resistance, a sign that the outlook for Fed policy ultimately hinges on coming data and how much the Delta variant impacts the economy. The Fed today issues its July meeting minutes.


The euro steadied as it fought off for now another attempt to push it through a floor seemingly made of concrete. Still, the euro slipped to fresh multimonth lows overnight as the dollar held the upper hand in risk averse trade. Euro zone inflation confirmed headline prices just above the ECB’s 2% goal in July, though less volatile core printed below 1%, levels consistent with the central bank trailing the Fed in shifting away from rock bottom interest rates.


Higher oil prices and the hottest inflation in a decade helped the Canadian dollar rebound from four-week lows. Area inflation accelerated more than expected to a 3.7% annual rate in July, the highest since 2011. That overshot forecasts of 3.4% from 3.1% in June. Higher inflation, while impacted by base effects, is consistent with the Bank of Canada further reducing its economy-boosting asset purchases into year-end, though much hinges on the fourth wave of the virus. Oil climbed by 1% to above $67.


The UK pound stabilized after a data-induced fall to nearly four-week lows. Sterling initially fell after area inflation slowed and managed to hit the Bank of England’s bullseye of 2% in July. That was below forecasts of 2.3% and down from 2.5% in June, the highest in nearly a year. While welcome news for households, prices are expected to accelerate anew in the months ahead, pushing up inflation, a scenario that could spur the UK central bank to reduce stimulus.

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