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Currency Market Analysis

Sep 21, 2021 | Currency Market Analysis

Global Themes

A tentative calm returned to global markets Tuesday, leading the U.S. dollar to step down from four-week highs. The cautiously improved market mood allowed the euro, sterling and Canadian dollar to recover from one-month lows. Wall Street a day earlier suffered its sharpest slide in months on worries that one of China’s debt-strangled property builders could soon default and spread contagion risk around global financial markets. While worries about China have moderated, they remain elevated, suggesting that safe haven assets may hold the upper hand over the near-term. Helping the loonie’s recovery from one-month lows, Justin Trudeau was the projected winner of Canada’s parliamentary elections, but his Liberal Party stopped more than a dozen votes short of a majority in the House of Commons. Markets today will keep one eye on embattled Chinese builder Evergrande and the other on the Fed which starts a two-day policy meeting.


Sterling rose above four-week lows ahead of transatlantic central bank decisions that could help guide GBP/USD over the balance of the year. The Fed issues a much-anticipated policy decision Wednesday when it is expected hold fire on changes but it could telegraph more firmly that it’s on track to taper its $120 billion-a-month bond-buying program that aims to hold down long-term interest rates. The Bank of England looms on Thursday. Expectations for hawkish signals from London have diminished after UK consumer spending contracted for a second straight month, aggravating growth concerns. 


The loonie rebounded alongside stock and oil markets, and projections for Justin Trudeau to win the most seats in parliament, though not enough to secure a majority government. Reports suggested Mr. Trudeau’s Liberal Party won 156 seats, below the 170 needed for a majority in the House of Commons. The third election win for Mr. Trudeau was enough to reduce loonie-negative political uncertainty. While firmer, Canada’s dollar remains anchored near the bottom of its range and less than two cents from 2021 lows. 


The euro rose above four-week lows, helped by its resilient performance Monday when it managed to end a volatile day flat. The euro for now has found formidable support, a level that could be tested when the Fed Wednesday issues a policy decision and new economic forecasts. The euro could weaken anew if the Fed should put a 2021 taper more firmly on the table. On the other hand, a Fed that sounds less hawkish and non-committal on policy tapering this year, wanting to see a stronger job market, could be the euro’s ticket higher.  


The U.S. dollar moved below four-week highs as a tentative calm returned to global markets. The buck faces daunting event risk Wednesday in the form of a Fed policy update. The dollar could take aim at recent highs if the Fed strongly signals a policy taper, doesn’t materially downgrade its economic forecasts, and more officials sound amenable to a rate hike next year. The dollar could fall, though, if the Fed should sound non-committal on tapering and its forecasts cast doubt on a 2022 rate hike. A mix of hawkish and dovish signals that pin tapering on a stronger job market would tend to keep the buck confined to its ranges. The Fed issues a policy statement and new economic projections at 2 p.m. ET Wednesday, followed by a press conference by Chair Powell at 2:30 p.m.

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