Currency Market Analysis

Jan 12, 2022 | Currency Market Analysis

Global Themes

Caution ahead of key U.S. inflation data today helped the dollar steady after an overnight slide to multiweek lows. The euro and sterling kept toward the upper end of their range against the dollar, with the latter at two-month highs. The Canadian dollar extended a rally, hitting eight-week highs, as hopes for a bounce back in energy demand boosted oil prices to two-month peaks around $82. Markets are on edge ahead of key U.S. December inflation that’s forecast to accelerate at an annual rate of 7%, the fastest in 40 years. The buck has been largely grounded of late as markets already have highly hawkish expectations for Fed policy this year. To be sure, Fed Chair Powell this week suggested the U.S. economy was ready for more normal, higher rate policy but that it would be “a long road to normal.” Markets are pricing about an 80% likelihood of interest rate liftoff starting in March.


Canada’s dollar strengthened to eight-week highs as the greenback sputtered and oil rallied to two-month peaks above $82. As expected, a report on America’s annual rate of consumer inflation rose 7% in December, the fastest since 1982, that met expectations and therefore didn’t move the needle for the Fed whose likelihood of a March rate hike stands at around 80%.


The euro was camped at the upper end of it range against the greenback, a currency that has struggled to gain altitude in the early stages of 2022. Bullish news on the euro zone economy today supported the euro, as industrial output jumped 2.3% in November, above forecasts of a 0.5% increase. While the euro continues to benefit from the greenback’s underperformance of late, underlying sentiment toward Europe’s shared currency remains bearish, leaving it vulnerable to selling on rallies.


Sterling shrugged off political risk as it glided to fresh two-month highs against its U.S. counterpart. Rate hike expectations continue to offer a sturdy pillar of strength for the pound. The market prices an elevated risk of the Bank of England raising borrowing rate for a second time since December in early February. Opposition lawmakers in Britain have called for Prime Minister Boris Johnson to step down after he attended a lockdown party in 2020. The pound’s resilience is a sign that the market for now sees a low risk of Mr. Johnson resigning as a result of the controversy.


The dollar fell after U.S. consumer inflation rose broadly in line with market expectations, keeping intact a highly hawkish outlook for Fed policy. Monthly consumer prices slowed in December to a 0.5% increase, down from November’s 0.8% jump. Consumer prices over the past 12 months soared by 7%, the fastest since 1982, and in line with the forecast. The economy appears ready for interest rate liftoff to start in March. But that’s not helping the dollar given the market already pricing an 80% chance of a March rate hike.

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