Currency Market Analysis

Jan 13, 2022 | Currency Market Analysis

Global Themes

The U.S. dollar fell into a deeper hole, its biggest in two months, a day after the highest American inflation in decades confirmed expectations for the Fed to raise interest rates. Broad weakness pushed the greenback to fresh two-month lows against the euro, sterling and Canadian dollar. The dollar has struggled to build on last year’s robust gains despite bullish data over the past week that showed unemployment near half-century lows below 4%, and the fastest consumer inflation (7%) since the early 1980s. The buck’s inability to rally stems from markets having already penciled the Fed raising rates at least three times this year. While on the defensive, scope for more meaningful dollar losses could be checked by elevated Treasury yields or anything that suggests the Fed may need to act more aggressively than what’s already priced. Oil not far from last year’s high of $85, the highest since 2014, won’t do anything to quell fears of inflation becoming entrenched.


The dollar stuck around two-month lows as fresh data backed the case for the Fed to raise rates. Weekly jobless claims unexpectedly jumped but to a still-healthy level of 230,000 in the latest period. Producer prices, a gauge of business inflation, ticked up to an annual rate of 9.7% in December. Like this week’s U.S. consumer inflation, today’s data keep the needle set to 3-4 Fed rate hikes this year which is already factored in to the dollar’s value.


Oil’s surge above $80 and not far from last year’s peak of $85, the highest since 2014, has brightened the near-term prospects for the Canadian dollar. Coupled with a decidedly weaker greenback, the loonie rolled to two-month peaks. Higher energy prices, though, loom as the type of catalyst that could lead the market to upgrade its already hawkish outlook for Fed policy, a potential factor that could limit U.S. dollar declines and potentially set the stage for a rebound.  


Sterling popped to fresh two-month highs against its struggling U.S. counterpart. Dollar underperformance, coupled with expectations for the highly unpredictable UK central bank to raise borrowing rates next month, continues to underpin the UK currency. British growth figures Friday could offer a fundamental test of strength for the pound. Forecasts suggest growth accelerated by 0.4% in November after its anemic gain of 0.1% in October.


The euro climbed to new two-month highs against its suddenly vulnerable U.S. rival. The euro has rebounded nearly three cents, or 2.5%, from its 2021 low. Market positioning is partly at play given the elevated levels of dollar longs and euro shorts which are bets on the single currency adding to last year’s decline. The euro is about a cent away from signaling a bullish turn that could open the door to sustained gains over the near term.  

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