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Currency Market Analysis

Oct 01, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar eased off one-year highs but was still poised for its best week in months. The dollar’s cooler start to October allowed the euro, yen and sterling to rebound from 2021 lows. Canada’s dollar kept to a range with downside checked by elevated oil prices. The dollar has found a string of positives in U.S. rate hike expectations trending forward and safe haven support from worries about a slowing world economy. Coupled with the highest inflation in years, it’s put a Fed rate next year more firmly on the table. A bigger than expected jump in euro area inflation to 3.4% annual rate in September from 3% in August lent some relief to the single currency which skid to 14-month lows this week. Sterling also recovered but was still at risk of its worst week in a month. A slew of data Friday features Canadian growth and U.S. consumer spending which comes with the Fed’s inflation yardstick.


The euro’s slide to July 2020 lows abated Friday thanks to area data showing the highest inflation in more than a decade. Consumer prices in the euro bloc jumped at an annual rate of 3.4% in September, the highest since 2008, from 3% in August. Elevated inflation has global central banks on high alert with some contemplating scaling back stimulus sooner than previously expected. Core inflation, at 1.9%, stopped just short of the ECB’s 2% goal.


Signs of U.S. inflation at or near a peak caused the dollar to drift below one-year highs. The Fed’s main measure of inflation, the core PCE index, steadied at 3.6% in August which met expectations and was largely consistent with the Fed’s view that high inflation should abate over coming months. Consumer incomes rose while their spending jumped a brisk 0.8% which bodes better for third quarter growth.


Sterling recovered from nine-month lows but was still at risk of logging its worst week in a month. GBP/USD has shed around 1 ½ cents this week amid a mix of broad based U.S. dollar strength and rising worries about Britain’s economic health. The pound found tentative support and benefited from an improvement in risk sentiment that eased demand for the greenback.


Negative growth and less buoyant oil markets converged to weigh on the Canadian dollar. Canada’s economy fell 0.1% in July which was slightly better than expected but still depicted the economy in reverse after it staged a shock second quarter contraction. Oil, while elevated, moderated below its September close of $75, limiting positive traction for the Loonie. Canada issues its September jobs report next week which will help shape expectations for the Bank of Canada’s late October policy decision.

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