Currency Market Analysis

Sep 16, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar rose to September highs ahead of next week’s Fed meeting. The euro led declines against the dollar with the single currency near three-week lows. The buck edged higher against sterling and its Canadian counterpart. The dollar continues to waver as signs of a moderating pace of recovery in the U.S. clouds prospects for the Fed to reduce stimulus. Downside for the dollar has been limited as struggles on Wall Street this month have underpinned safer assets. The dollar stumbled this week after inflation moderated more than expected. Still, the market sees an elevated risk of the Fed tapering stimulus this year since the central bank already acknowledged that inflation had met its test of substantial further progress. Look for the buck to take cues today from influential data on U.S. consumer spending and weekly jobless claims.

GBP

Data-inspired gains shifted to the greenback and away from sterling following surprise signs of resilience in the world’s biggest economy. The pound had strengthened a day earlier after UK inflation soared to multiyear highs above 3% which bolstered the case for the Bank of England to raise rates around the first half of 2022. But a solid batch of U.S. data Thursday, including on the economy-driving consumer, suggested the Fed could drop stronger signals it’s closer to reducing stimulus.

EUR

Euro bears are on the prowl ahead of a fast-approaching Fed meeting. The euro skid to Aug. 27 lows, its weakest in nearly three weeks. The Fed issues a policy update on Sept. 22 that threatens to put a spotlight back on central bank policy divergence that has weighed on EURUSD. For only the second time this month, the pair has fallen below a key threshold. Downside risk for the euro could increase if the Fed next week delivers a strong signal that it policy tapering is likely before year-end.

CAD

Canada’s dollar was little changed as the firmer greenback and elevated oil prices largely offset. Oil slipped from six-week highs of $73 but remained well above $70, an elusive level until this week. Not helping the loonie’s cause, local house starts slowed more than expected to an annual rate of 260,200 units in August, another sign of a vulnerable economy due to the fourth wave of the virus. Political risk ahead of Canada’s Sept. 20 election has kept the loonie broadly rangebound.

USD

Taper-friendly data and signs of a resilient U.S. economy pushed the dollar to new session highs, its strongest in three weeks. Retail sales surprised to the upside by rising 0.7% in August compared to forecasts of a 0.8% decline. While weekly jobless claims rose to 332,000 they remained close to pandemic lows of 312,000 the previous week. The Philly Fed index reported stronger than expected factory growth around the U.S. Mid-Atlantic. Add it all up and one of the last looks at the economy before the Fed’s Sept. 22 meeting was a constructive one, suggesting a green light for the Fed to signal more forcefully that tapering is near.  


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