Global Themes

A fast and furious selloff in the U.S. currency landed it in its biggest hole in four and 12 months against the Canadian dollar and euro, respectively, while the trade-weighted buck notched a seven-month bottom. America’s dollar ran into a buzz saw this week in the form of hawkish hints from the ECB, and Washington’s continued inability to advance the president’s economy-positive agenda. The euro awoke to one-year highs after the head of the ECB hinted at an eventual reduction in monetary stimulus as the bloc’s economy continues to gain steam. The Federal Reserve stands to lose its ‘only game in town’ status, which has long been supportive of the dollar, as other central banks contemplate a reduction in stimulus. We’re only at the midpoint of an events-packed week, with key inflation data from both sides of the Atlantic on Friday likely to serve as a reality check for the euro’s bounce and the dollar’s decline.

USD

The U.S. dollar steadied after sinking to seven-month lows on a trade-weighted basis. The buck’s sharp swoon appeared a bit exaggerated given the solid underlying shape of U.S. fundamentals. Somewhat lost in the dollar’s decline has been a marked spike in U.S. government bond yields with the 10-year earlier hitting 2.25%. Earlier this week, yields had hit fresh lows for the year around 2.10%. Higher yields signal greater market conviction in the Fed delivering a rate hike over the balance of the year. Key U.S. and euro zone inflation data Friday loom next to drive major currencies. Month- and quarter-end positioning could keep currencies on volatile ground.

EUR

The euro climbed to its strongest in a year against the dollar, still basking in the afterglow of surprisingly hawkish hints from Mr. Mario Draghi, the president of the ECB. The euro appreciated another quarter of a percent after soaring some 1.4% on Tuesday which marked the single currency’s best day in a year. Bullish words from Mr. Draghi cracked open the door to a stimulus reduction in the months ahead, providing the bloc’s recovery remains in full swing. The euro’s higher altitude faces a reality check in area inflation data Friday.

GBP

Sterling firmed to post-U.K. election highs against the dollar but slumped to seven-month lows against the ECB-rejuvenated euro. The pound largely tracked the euro higher against the dollar. While sterling sentiment has brightened as multiple Bank of England officials signal support for an inflation-strangling interest rate hike, underlying uncertainty remains over political leadership and Brexit, factors that can slow appreciation in the pound. 

CAD

The loonie took a page out of the euro’s playbook as it enjoyed a strong, central bank-inspired rally to multimonth peaks. The Canadian dollar shot to four-month peaks after Bank of Canada Gov. Stephen Poloz noted how area growth has been ‘surprisingly strong’ and that the central bank should at least consider an interest rate hike from 0.50%. The market currently sees about a 40% chance of the BOC hiking at its coming rate meeting on July 12.

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