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Currency Market Analysis

Nov 02, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar steadied as it bided its time ahead of a key policy update Wednesday from the Federal Reserve. While mostly firmer, the greenback fared mixed with declines against the yen and gains versus the euro, sterling and Canadian dollar. The spotlight this week is on central banks who are already setting currencies in motion. The Aussie dollar tumbled nearly 1% after the Reserve Bank of Australia maintained a dovish outlook for policy. The buck is generally supported ahead of Wednesday’s Fed statement. America’s central bank is all but certain to announce it will start to taper its $120 billion a month bon buying program while a post-meeting press conference by the Fed chair is likely to acknowledge that elevated inflation is proving less than transitory. The Bank of England Thursday will follow the Fed, with it considered a coin toss whether London will raise rates to help slow inflation. 


Fresh declines pushed sterling to nearly three-week lows against the greenback. The pound has been dogged by rate hike uncertainty in the run-up to the Bank of England’s policy decision Thursday. It’s considered a coin toss whether London will raise rates from record lows of 0.10%. Higher rate policy would help slow inflation but it would come at the risk of exacerbating underlying economic weakness. How the nine members of the BOE’s rate-setting committee vote could be telling about the near-term interest rate outlook. A divided central bank would tend to suggest limited scope for pound-positive rate increases.  


The Canadian dollar slipped toward last week’s mid-October lows, pressured by weaker oil markets and a stronger greenback. It also hasn’t helped the loonie that Canadian economic recovery optimism has faded a bit after underwhelming GDP data last week. Oil, while still elevated above $80, softened below recent seven-year peaks around $85, putting at least a gentle headwind on the commodity-influenced loonie. Canadian data Thursday on trade and Friday on the job market will serve as the next barometers of the recovery.


The euro largely played the middle of its range ahead of the week’s main event: A Fed policy announcement Wednesday. The euro would be at heightened risk of testing fresh lows for the year if the Fed sounds a hawkish note on inflation and should validate growing bets on a U.S. rate hike around mid-2022. A hawkish Fed would contrast the ECB which has downplayed higher prices, and has been slower to signal a change in course from economy-supportive low rate policy.

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