Currency Market Analysis

Aug 19, 2021 | Currency Market Analysis

Global Themes

Fresh highs for the greenback Thursday pushed it to November 2020 peaks. The stronger dollar knocked sterling and the Canadian dollar to one-month lows, while the euro sank to its lowest level in 9 months. Elsewhere, the Aussie and kiwi dollars hit a new 2021 bottom, while the Mexican peso flirted with one-month lows. The buck’s latest leg higher stems from rising expectations for the Fed to dial back on stimulus. The takeaway from this week’s Fed minutes was that the central bank was on track to reduce its bond purchases by year-end. Meanwhile, the case for an imminent taper has strengthened following a second straight month of substantial hiring in July. Moreover, market trepidation over rising coronavirus infections, slowing Chinese growth and increased geopolitical uncertainty in Afghanistan have added traction to the dollar’s ascent.

USD

Fresh signs of the labor market making the “substantial further progress” the Fed wants to see before dialing back on stimulus kept the greenback aloft around 2021 peaks. Weekly jobless claims improved more than expected to a new pandemic low of 348,000. That marked the fourth straight week of improvement and the lowest level in 17 months. The latest number coincided with the survey period for the next monthly jobs report which bodes bullishly for August hiring.

EUR

The euro finally fell below a key floor that knocked it to November 2020 lows. The euro fell prey to rising expectations for the Fed to soon announce plans to rollback monetary stimulus. That announcement could come as soon as next month if the next U.S. monthly jobs report, due Sept. 3, is consistent with a strengthening labor market.

CAD

Commodity currencies skid to new lows with the Canadian dollar at a one-month trough, while rivals from Australia and New Zealand hit a late 2020 bottom. Sinking global stocks and oil markets are weighing, along with growing expectations that the Fed could soon announce plans to cut back on stimulus. Oil plunged 3% to below $64, the lowest in three months.

GBP

Twin headwinds blew the UK pound to its lowest level in nearly a month against the greenback. Sterling continues to struggle as sinking global stocks undermine risk appetite, a key positive for the pound, and steer flows to the safer greenback. The pound’s fall may be a bit overdone given Britain’s generally solid economic fundamentals that suggest Britain’s central bank may be on a similar policy path as the Fed. UK retail sales on Friday, seen up for a second straight month, will be important for the wobbly pound.


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