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Currency Market Analysis

Aug 31, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar fell to new multiweek lows as it continued to reel after the Fed offered an inconclusive timeframe for rolling back stimulus. While generally higher for the month, the greenback skid to two-week lows against rivals from Britain and Canada, and hit a three-week bottom versus the euro. The buck’s latest setback stems from a speech last week by Fed Chair Jerome Powell who didn’t offer a strong signal about when America’s central bank would start to reduce its monthly bond purchases from $120 billion. While the Fed chair opened the door to a taper this year, it’s now up to the economy to push it through. That puts heightened focus on data between now and the Fed’s next policy announcement on Sept. 22. Market sights are set on Friday’s August jobs report, seen as potentially making or breaking the case for an imminent reduction in central bank stimulus.


Canada’s dollar surrendered gains that had propelled it to two-week highs after shock news that the nation’s economy contracted during the spring. Canada’s economy contracted at a 1.1% annual rate during the second quarter as the third wave of the coronavirus took a bigger than expected bite out of growth. The silver lining, though, was that the economy staged a late quarter bounce as growth for the month of June increased by 0.7% from a downwardly revised fall of 0.5% in May. Canada’s economy showing more vulnerability to the virus could buy the Bank of Canada more time for its bond buying program, a prospect that’s loonie-negative. 


Sterling popped to two-week highs against the dollar which helped it pare month-to-date declines of around 1%. A lack of much UK data until later this week led sterling to largely track EUR/USD movements. Britain issues final numbers on manufacturing and services growth on Wednesday and Friday, respectively, key readings on the economy that can help guide expectations for UK central bank policy. 


The euro narrowed monthly declines and jumped to three-week highs, boosted by data showing the highest inflation in the bloc in a decade. Consumer prices in the euro zone jumped 3% in August, the highest in 10 years, eclipsing forecasts of a 2.7% increase and July’s rate of 2.2%. Still, less volatile core inflation, which doesn’t include food and energy prices, remained below the ECB’s 2% goal, at 1.6%. Nevertheless, euro bulls are excited by the prospect that higher inflation could help to hasten ECB tapering talk. 

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