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Currency Market Analysis

Oct 13, 2021 | Currency Market Analysis

Global Themes

The greenback cooled from one-year highs ahead of key U.S. inflation data that, if hot, would cement prospects for the Fed to reduce stimulus. The dollar eased off new July 2020 peaks against the euro and its strongest in nearly three years versus the yen. The UK pound kept firm along with Canada’s dollar whose oil-inspired rally has it near late July highs. America issues consumer prices today that are forecast to show inflation remained persistently high in September. The annual headline rate is expected to hold above 5%, one of the highest readings in over a decade. Top Fed officials this week maintained that high inflation should prove “largely” temporary. While markets mostly share the Fed’s inflation view, it remains unclear when prices would moderate. The longer inflation lingers, the greater the risk of the Fed moving sooner than expected to raise lending rates, a dollar-positive scenario.


Sterling rose against the dollar, helped by improved risk sentiment with Wall Street futures in positive territory, suggesting equities might bounce back after a multi-session swoon. UK data today stopped a bit short of cementing expectations for the Bank of England to lift interest rates off crisis lows. Britain’s economy expanded 0.4% in August, slightly below forecast, while July growth got downgraded to a mild contraction. Industrial output jumped 0.8% in August but it too came with a downward revision for the prior month, evidence of a still-fragile recovery.  


The U.S. dollar index rose toward one-year peaks after the latest snapshot of monthly inflation increased more than expected. Consumer prices rose at an annual rate of 5.4% compared to forecasts to steady at 5.3%. The data was the latest to suggest that any moderation in high inflation would likely happen later rather than sooner, which will increase pressure on the Fed to dial back on stimulus sooner, the narrative that’s put significant upward pressure on Treasury yields and the value of the greenback.


Canada’s dollar kept buoyant and around 10-week highs as oil moderated but held near seven-year peaks above $80. The recent boom on commodity prices has pushed the C$ back into positive terrain for the year. Meanwhile, signs of Canada’s economy accelerating from a spring soft patch also have proven loonie-positive, keeping Ottawa on pace to reduce stimulus later this month.


The euro steadied after a slide this week to mid-2020 lows. Mounting signs of a slowing European economy have added traction to the euro’s monthslong downtrend. Data this week showed a fifth straight monthly slide in German economic sentiment, and a 1.6% contraction in euro zone industrial production in August. The IMF this week slashed its forecast for German growth this year to 3.1% from its previous estimate in July of 3.6%.

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