Currency Market Analysis

Jan 06, 2022 | Currency Market Analysis

Global Themes

The U.S. dollar was steady and somewhat surprisingly grounded a day after minutes from the last Fed meeting struck a resoundingly hawkish tone. The buck was little changed versus counterparts from Europe, Japan, and Canada. The Fed this week issued the intimate details of its mid-December meeting that proved more hawkish than anticipated. The December minutes showed that “most” officials thought that “conditions for a rate hike could be met relatively soon.” Moreover, the minutes indicated that high inflation and falling unemployment could warrant a “sooner or faster pace” of rate hikes. Markets now price at least a 70% chance of a rate hike as soon as March, while the minutes were so hawkish that they put as many as four rate hikes this year in the conversation. For further clues on the outlook for Fed policy, market eyes today will be on U.S. weekly jobless claims, trade, and services growth.

EUR

The euro was broadly steady as it benefited from good news on the German economy and the dollar’s lethargic response to decidedly hawkish Fed minutes. Industrial orders from the bloc’s biggest economy proved stronger than expected as they surged 3.7% in November, well above forecasts of a 2% increase. The euro has gone six weeks since it hit 16-month lows against the greenback.

GBP

The UK pound was mostly steady against its U.S. rival with upside slowed by market trepidation over the prospect of more aggressive rate increases from Washington. Underlying sterling sentiment remained positive though, thanks to solid UK data this week that kept the door open for the Bank of England to raise interest rates next month. Britain’s economy-driving services sector enjoyed a surprise upgrade for the month of December, evidence of the economy so far weathering the latest wave of the coronavirus.

USD

The U.S. dollar kept mostly grounded despite resoundingly hawkish Fed minutes that paved the way to a sooner interest rate hike and as many as four quarter-point increases by year-end. It’s been since just before Thanksgiving that the greenback notched 16-month highs, a reflection of the buck’s overbought status and how the pro-dollar bandwagon has become a bit overcrowded. Dollar sentiment remains positive but it likely needs to test last year’s highs before it embarks on a new leg higher. Data today showed weekly jobless claims unexpectedly rose though to a still healthy 207,000 from a revised 200,000 the prior week. Next up: U.S. services growth at 10 a.m. ET followed by the week’s marquee event: nonfarm payrolls Friday.

CAD

The loonie was steady as U.S. rate hike jitters largely overshadowed stronger oil and data offering more evidence of a recovering Canadian economy. Canada posted a trade surplus of C$3.13 billion in November, the biggest since September 2008, as exports outpaced imports. All eyes shift to Canada’s employment report Friday with hiring of around 27K and steady unemployment of 6% on the cards. Higher oil flirted with $80.


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