Currency Market Analysis

Nov 03, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar was mildly subdued ahead of the Fed’s much-anticipated policy decision later today. The buck was little changed to softer versus rivals from Europe and Canada. The Fed is expected to announce today that it will slow support to an economy whose recovery from the pandemic recession has pushed inflation sharply higher and led to steadily declining unemployment. It’s unclear whether the Fed will help the dollar sustain or augment its gains or if it should weaken, given that policy tapering has been well telegraphed. A Fed that should take a page out of Canada’s hawkish playbook of acknowledging prospects of an early rate hike to put a lid in inflation would tend to be greenback-positive. But if the Fed should downplay early rate hike expectations, like the euro zone and Australia did recently, such a dovish stance could weigh on the dollar. America’s central bank issues its decision at 2 p.m. ET followed by a press briefing by Chair Powell 30 minutes later.

USD

The greenback enjoyed underlying support thanks to evidence of a strengthening labor market. Payrolls company ADP reported that private employers unexpectedly stepped up hiring by 571,000 in October which far exceeded forecasts of 400,000, and followed a revised increase of 523,000 in September. A stronger job market is considered a prerequisite for the Fed to raise interest rates next year, a bullish scenario that’s dollar-positive.

EUR

The euro steadied around lows for the year against the greenback as it found tentative support from encouraging news on the bloc’s job market. Euro zone unemployment ticked down as expected to 7.4% in September, the lowest level since April 2020. The euro isn’t out of the woods, however, with the Fed set to render a policy decision hours from now. A Fed that should acknowledge growing unease over soaring inflation would corroborate with market expectations for the Fed to boost lending rates and thus the dollar’s appeal before the ECB.

GBP

Sterling bounced above its lowest level in about three weeks as better than expected news on Britain’s main growth engine was considered supportive of an imminent hike in area borrowing rates. Britain’s economy-driving services sector grew at a faster than expected pace last month which helped to allay concerns about moderating growth. Sterling could rally in relief Thursday if UK central bankers decide to lift rates from record lows of 0.10%, a move that would surprise a significant segment of the market.

CAD

Canada’s dollar remained in a hole for the week against the greenback as oil prices moderated more than 2% to $82. The loonie also has lost thrust as recovery optimism faded following softer than expected growth toward the end of the third quarter. Key for the outlook for USD/CAD will be whether the Fed takes a page out of Canada’s more hawkish monetary playbook and pencils in a sooner than expected rise in borrowing costs to help check accelerating inflation.


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