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Currency Market Analysis

Sep 24, 2021 | Currency Market Analysis

Global Themes


Pound boosted by hawkish BOE
The Bank of England (BOE) left interest rates at 0.1% and asset purchases unchanged, but an additional Monetary Policy Committee (MPC) member voted to end the bank’s bond buying programme in a sign that the case foe monetary tightening is building. Sterling scored its best daily rise against the dollar since June, climbing nearly 1% to reclaim $1.37, whilst GBP/EUR grappled with €1.17 after springing nearly a cent higher from the day’s low.
The BOE leaned on the hawkish side yesterday, referencing ongoing inflationary pressures as a reason to potentially hike interest rates sooner than anticipated. The central bank bumped up its inflation forecast to 4% this year - double its target rate - due to surging energy prices and bottlenecks in supply chains but the BOE also noted these issues to be temporary. Still, sterling interest rate futures jumped, pricing in a 90% chance of a rate hike in February 2022 and a 95% probability of a cumulative 40 basis points hike to 0.5% by June next year.
The pound’s BOE-fuelled rise sent it soaring against most peers yesterday, particularly the Turkish lira (2% rise), which was sold aggressively after a surprise interest rate cut by Turkey’s central bank. The pound weakened versus Norway’s NOK (0.5% fall) though, following an interest rate hike by the Scandinavian central bank.


Political deadlock to induce volatility? 

According to implied volatility, markets aren’t expecting the German election on Sunday to shake currencies majorly, however, this is a significant event that will mark the start of a new political era in Europe’s biggest economy. A three-party coalition government is looking more and more likely, but the combination is uncertain, and this uncertainty could trigger market volatility.

The euro rebounded from the $1.17 support level versus the dollar this week after investors took the Federal Reserve’s meeting in their stride and returned to riskier, higher yielding assets whilst selling safe havens, including the US dollar. After climbing to a 2 ½ -year high of $1.2350, EUR/USD is in a down phase though, registering a cumulative loss of nearly 4% in 3 months. Monetary divergence between the US and Eurozone is a huge weight on the common currency at present and could grow heavier if the German election sparks increased political uncertainty and drag the world’s most traded currency pair under the key $1.17 support level by Monday morning.

A weaker euro could allow GBP/EUR to reclaim €1.18 too, and although the currency pair is on track to record is first weekly decline in five weeks, the recovery from the weekly low is a bullish signal that could support GBP next week.


Greenback bounce caps C$ gains

The Canadian dollar gave back some of its gains this morning due to strength in the greenback. Oil prices at a 3-month high, are trading hands at $73 a barrel supporting the commodity currency. However, Canadian dollar gains are capped by a stronger U.S dollar supported by rising U.S treasury yields. Market Focus will be on the speech by Fed Chair Jerome Powell later this morning which could give the greenback further momentum.

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