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Currency Market Analysis

Aug 24, 2021 | Currency Market Analysis

Global Themes

Markets staged a strong recovery yesterday leaving the US dollar nursing its biggest daily loss since May 2021. The current risk-on environment is weighing on the safe haven US dollar. As equities and oil prices surge, risk-correlated currencies like the AUD, CAD, NOK and SEK all rallied about 1% versus the world’s reserve currency on Monday.

US flash economic data confirmed the slowdown of the US economic recovery, with service sector growth hitting an 8-month low. Business activity growth slowed for a third successive month, highlighting the slowing momentum of the economic rebound. Despite the lacklustre PMI surveys globally though, investors appear to be cheering the prospect of extended central bank stimulus given hawkish Fed members recently leaning towards a more dovish view regarding tapering too early amid Delta variant concerns.

All eyes are pinned on the Jackson Hole symposium for more guidance from the Fed about this topic of the timing of tapering asset purchases and raising interest rates. Monetary policy divergence has been benefiting the dollar over recent months, but will the Fed deliver the expected hawkish tone or take a surprisingly dovish stance this week?


Oil recovered from its worst week this year overnight. This lead to a rally in most oil lead currencies including CAD, RUB & NOK.

After last weeks increased fears of a surge in the Delta variant of the coronavirus, major oil currencies took a beating. Canadian dollar in particular had its worst week since March 2020. Following the spike in oil prices overnight, CAD, RUB and NOK start the morning against the dollar. The market will be keeping a close eye on the spread of the highly infectious delta variant as if it starts taking a hold, that could seriously dampen recovery efforts.


The British pound extended its rebound against the US dollar yesterday, reclaiming the $1.37 handle after dropping about 1.7% to a 1-month low last week. Investors sought out cheaper, higher yielding assets, which benefited the risk-correlated pound, despite UK PMIs signalling the UK economic recovery is stalling.

Concerns over the pace of global growth in light of rising Covid infections worldwide have recently hit risk appetite, but after a tough week last week, market participants bought back into equities, oil and commodity-linked currencies yesterday. Sterling also appreciated despite UK output growth slowing to a 6-month low, with recoveries in both manufacturing and service sectors losing momentum. Staff shortages due to self-isolation and unfilled vacancies and supply chain issues like material shortages and shipping costs were to blame for the slowdown. Still, both survey readings topped 50, meaning the majority of companies reported an increase in activity over the previous month. Meanwhile, in a boost to UK manufacturers, the UK government will allow businesses to continue to use European CE certification for another year, reducing supply chain risks.

In the short-term, the pound will be driven by the Jackson Hole meeting this week, but in the long-term, consumer spending holds the key to the UK economic rebound. The potential for a greater proportion of excess savings to be spent is a key source of upside risk to the growth forecasts and the valuation of sterling.


Consumer and government spending has helped fuel a swift German economic recovery, with data this morning revealing Europe’s economic powerhouse expanded 1.6% in the three months to June.

The consumer-led rebound is putting the German economy on track to reach pre-pandemic levels in the next few months, which should help support the common currency from falling too sharply. However, alike the UK, the recovery is stalling due to ongoing raw material and staff shortages as well as supply-chain bottlenecks. The spread of the Delta variant possibly forcing lockdowns to be reinstated is also a major downside risk to current economic projections. Meanwhile, the European Central Bank continues to err on the side of caution, maintaining its unprecedented levels of bond buying and keeping interest rates at record lows, which is likely to limit demand for the euro as policy divergence increases.

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