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Currency Market Analysis

Oct 28, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar and its main peers were little changed and range-bound as investors absorbed an ECB policy decision and U.S. economic figures. As expected, the ECB left policy unchanged as the bloc slowly recovers from the pandemic downturn. With inflation across the 19-country euro bloc above 3% and at risk of reaching 4% by year-end, the ECB could announce policy changes at its next gathering in mid-December. Canada’s dollar kept to recent ranges, albeit the upper end, after the highest domestic inflation in nearly two decades led the Bank of Canada this week to abruptly end its bond buying stimulus and pull forward interest rate hike expectations by three months. A post-meeting press conference by the ECB president, coupled with important U.S. third quarter growth and jobs data, could arouse some FX volatility.

USD

The U.S. dollar largely shrugged off mixed data showing slower growth and fewer jobless claims. The world’s biggest economy grew at a 2.0% annual rate in the third quarter which disappointed forecasts of 2.7% after output expanded at a brisk 6.7% pace in the spring. The delta strain of Covid was a key drag on growth last quarter, one that appears to have abated. To be sure, the more timely weekly jobless claims improved to fresh pandemic lows of 281,000, the fourth decline in as many weeks. While U.S. growth moderated sharply in Q3, forecasts suggest it has accelerated at least 6% in Q4.

GBP

The UK pound was broadly steady for the week ahead of next week’s much-anticipated rate meeting of the Bank of England. Sterling has been supported by the view that rates could rise as soon as Nov 4, with the British economy recovering from the pandemic and inflation bursting higher. Still, a rate hike is not assured next week with traders reassessing whether their rate forecasts have been too aggressive which has checked the pound’s rise.

CAD

Canada’s dollar was little changed after a central bank boost the previous day pushed it closer to recent four-month highs. The Bank of Canada halted its C$2 billion bond buying program ahead of expectations and signaled interest rates could rise as soon as the second quarter of next year, three months sooner than its July projection. Oil ceding ground has reduced the loonie’s upward drive.

EUR

The euro initially fell to 10-day lows against the greenback after a mostly dovish ECB left its stimulus settings on full blast to support a recovery that’s been hampered by supply shortages. The ECB left the deposit rate at -0.50% and didn’t change its EUR1.85 trillion bond buying program. Constructive news on Germany’s job market, as unemployment declined a tick to 5.4%, and the risk that euro area inflation, currently at 3.4%, could reach 4% by December suggests ECB President Christine Lagarde could use her post-meeting press conference to set the stage for December when the central bank could signal a reduction in stimulus.


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