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Currency Market Analysis

Jun 15, 2022 | Currency Market Analysis

Global Themes

The U.S. dollar surrendered some strength ahead of a big policy decision today from the Federal Reserve. That allowed the euro and Canadian dollar to rebound from four-week lows, while sterling rose above its weakest in two years. While today was billed as Fed Day with America’s central bank expected to raise rates by the most since 1994, a 75 basis point move to roughly 1.6%, the ECB is also in focus as it assembles for an unscheduled meeting. The ECB appears to be getting ahead of the Fed, not wanting to see Italian government bond yields continue to spike, a move that could trigger another debt crisis. Today’s central bank decisions, coupled with a reading on U.S. retail sales, are likely to unleash more volatility for FX markets with the dollar likely to benefit if the Fed telegraphs a steeper trajectory for borrowing costs to help it quash inflation.

EUR

ECB meets, attempts to put lid on Italian yields

News of a surprise ECB meeting today helped the euro rebound from the brink of fresh lows against the greenback. The ECB is meeting to discuss a worrisome rise in government bond yields for debt-strapped countries like Italy and Spain. The timing of the meeting appears aimed at getting ahead of what could prove to be the Fed’s largest rate hike in nearly 30 years, a sizeable 75 basis point increase that could add upward pressure on global yields. Failure of the ECB to spell out in detail how it plans to contain rising yields for indebted euro zone nations would risk another leg lower for the euro.

GBP

Sterling bears feast on the word ‘referendum’

Sterling reached a tentative bottom against the greenback after it plunged below a key psychological floor against the greenback and hit its lowest level since March 2020. If not for Brexit- and pandemic-induced plunges in 2016 and 2020, the pound would be at its lowest level since the mid-1980s. A risk that Scotland may pursue an independence referendum added fuel to sterling’s 2022 slide with GBP/USD down more than 10% YTD. These days the mere mention of the word ‘referendum’ tends to ignite significant pound-negative volatility as it only adds to a highly uncertain political and economic outlook in the UK.

CAD

C$ vulnerable to market reaction to Fed decision

A pre-Fed global market calm helped the Canadian dollar find its legs after sliding to four-week lows. The loonie has been roiled by market instability and what many see as a rising risk of a global downturn if central banks raise rates too high in a desperate bid to quash inflation. A Fed today that raises rates by three-quarters of a percentage point to about 1.6% and signals that rates could double from there would tend to strike a U.S. dollar-positive note.


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