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Currency Market Analysis

Sep 28, 2021 | Currency Market Analysis

Global Themes

GBP

Sterling remains vulnerable to global supply chain pressures, which are disrupting a number of UK sectors. The dash to buy fuel amid fears of a lack of delivery drivers has resulted in nearly 90% of fuel stations running dry. The pound rebounded yesterday though after Bank of England (BOE) governor Andrew Bailey reinforced the option of hiking interest rates next year to tame inflation.

As fuel prices surge over the UK and Europe, inflation concerns rise. Brent oil prices topped $80 a barrel yesterday, which boosted commodity-linked currencies like the Antipodeans and Norwegian krone. The UK fuel panic combined with the gas shortage also threatens to further disrupt the UK economic recovery – impacting the efficiency and profitability of businesses. This is a GBP-negative scenario. However, the UK is one of the first G7 economies to consider tightening monetary policy and raising interest rates could be the desired tool even before scaling back its bond-buying program according to Mr. Bailey yesterday. Markets are now pricing in a rate rise in February 2022, which explains the recent GBP support around the $1.36 level against the US dollar.

Although tighter monetary policy should in theory strengthen a currency, it will not soothe supply chain constraints and could even exacerbate the slowing economic recovery issue if action is taken at the wrong time.

EUR

The dust is starting to settle after the German election result on Sunday, despite the stalemate meaning a coalition is still to be decided. The euro is trading slightly softer, losing its grip on the $1.17 handle versus the US dollar and giving up the €1.17 threshold against the British pound.

Financial markets expect more spending no matter who leads Germany’s new government, with potential gains in green finance and modestly higher bond yields. In a post-Merkel Germany, the expectations of a less hostile environment for investment spending and increased European integration should be a euro-positive scenario in the long term. But for now, the common currency appears plagued by the political deadlock and GBP/EUR may be able to pounce and attack the resistance barrier of €1.18 this week.

On the macro side, the focus is on eurozone inflation this Friday, which is expected to rise 3.3% y/y and could trigger a fresh reaction from European Central Bank hawks. Ahead of that, business sentiment surveys and consumer confidence data drop in on Wednesday morning.

CAD

The Canadian dollar continues to draw strength as a result of record oil prices. This marks a three-year peak for oil trading hands at $76 a barrel, boosting the commodity currency. Oil prices are attributed to demand and in this case, demand has increased in the aftermath of Hurricane Ida, as well as increased in global demand. The U.S dollar gained on the loonie, as a result in a rise in U.S Treasury yields supporting the greenback to new highs for the year. The focus this week will be on GDP, and September PMI due at the end of the week. 

USD

US Treasury yields have been climbing since the hawkish tones from the US Federal Reserve (Fed) last week about tapering stimulus as soon as November this year. The US dollar holds a long-term negative correlation with 10-year bond yields, but in the short-term, the buck has been boosted.

There was lacklustre appetite for US government bond auctions yesterday, which saw bond yields, which move inversely to bond prices, climb to 3-month highs. The US dollar index, which measures the dollar against a basket of currencies, continues to inch higher after 3 weekly gains on the bounce. Meanwhile, although not market moving, a couple of hawks from the Fed have unexpectedly resigned. Boston Fed chief Eric Rosengren and Dallas’s Robert Kaplan separately retired, which puts the spotlight on whoever replaces them due to the significance of upcoming meetings in regards to altering monetary policy.

Today, investors will keep an eye on US consumer confidence data, which hit a 6-month low last month but is expected to show a rebound today – possibly further supporting the dollar.


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