Global Themes

Led by strong gains against the British pound, the U.S. dollar rose against most of its main rivals in holiday-light trade. Global markets were subdued on worries that Britain could be headed for a messy exit from the European Union in which it could lose access to Europe’s vast and tariff free single market. Brexit uncertainty on the eve of a speech by British Prime Minister Theresa May on the matter weighed heavily on the pound which sank 1 percent to multimonth lows against the dollar, euro and yen. The U.S. currency was broadly in favor though it lost altitude against the yen, another popular haven when global markets turn skittish. An eventful week ahead includes inflation reports from the world’s biggest economies, central bank meetings in Canada and the euro zone, and the inauguration of America’s 45th president on Friday. Major U.S. markets are closed today to observe Martin Luther King Jr. Day.

EUR

Most European currencies started the new week on their back foot against the U.S. dollar, including the euro which slipped by a half percent. Currency moves were likely exaggerated by thin markets with U.S. stocks, bonds and banks closed in observance of Martin Luther King Jr Day. The euro will take its cues this week from Germany’s ZEW survey of investor optimism on Tuesday, which is forecast to brighten, euro area inflation on Wednesday, and the year’s first policy decision by the ECB on Thursday. The 19-nation central bank is not expected to make any policy changes following its move in December to extend its QE stimulus to the end of 2017. The euro could find some support if the ECB should acknowledge encouraging data of late on inflation and unemployment.

GBP

Sterling started the week with a one percent plunge to October lows against the U.S. dollar, with Brexit worries running high on the eve of a speech by Theresa May, Britain’s prime minister. Sterling has fallen out of favor on the view that Mrs. May could sound amenable to a hard Brexit scenario that could cause Britain to lose access to its top trade partner: the EU. Any tone by Mrs. May that puts the priority on Britain gaining control over its borders at the expense of access to the bloc’s free trade market could leave the pound vulnerable to another big selloff. On the data front, Britain releases reports on inflation Tuesday, unemployment Wednesday, and retail sales Friday, the day America inaugurates its next president.

CAD

The loonie drifted lower against its broadly stronger U.S. counterpart in holiday-light trade with American markets closed for Martin Luther King Jr Day. Oil edged down which also weighed on Canada’s commodity-driven currency. Big risk events loom in the week ahead for the loonie with a Bank of Canada decision due Wednesday at which it is not expected to change its 0.50 percent base rates. Bankers’ overall assessment of the economy, along with fresh forecasts will be important for the loonie’s coming prospects. On Friday, Canada releases critical data on inflation and retail sales, the same day markets will listen carefully to an inaugural speech by America’s new president.

USD

The dollar started a holiday-shortened week with broad gains with many attracted to its safe harbor appeal with markets rife with worries about Brexit uncertainty. The changing of presidents on Friday will dominate market attention that will be shared with important U.S. data Wednesday on inflation. Forecasts call for annual consumer prices to increase by 2.1 percent in December from a 1.7 percent increase in November. Hotter inflation would help the case for the Federal Reserve to raise interest rates this year, a scenario that would underpin the U.S. currency.

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