The dollar started the new week lower, supporting the major currency pairs such as the euro/U.S. dollar (EUR/USD) currency pair and poubd//U.S. dollar (GBP/USD) currency pair this morning. There wasn’t any fresh news out to impact the greenback, so its weakness can be attributed in part to profit-taking.
If you were just to look at the where the major currencies are trading relative to yesterday’s US close, you’d think it’s been a pretty quiet day; after all, none of the majors are trading more than 0.3% from the day’s open as of writing. However, that apparent tranquility is masking some big moves (and subsequent reversals) over the last 20 hours.
The biggest themes in the markets this week can be summarized as: U.S. dollar strength; weakness in foreign currencies – particularly where the central bank is still dovish such as the Japanese yen and Swiss franc; and positive sentiment in the markets.
As we noted in our Bank of Canada Preview report, today’s BOC meeting was never really about if the central bank would raise interest rates (even after last night’s escalation in the global trade war); instead, traders were focused on BOC policymakers’ outlook for future economic growth and what that would mean for interest rates moving forward.
The euro flattened out early gains as the Pound dropped a penny on Brexit uncertainty at 8:30 am CT. While the pressure bled into the Euro, we do find this move a bit more technical than fundamental. The paring also occurred when ECB President Mario Draghi began speaking; he was upbeat on the economy and the positive effects of quantitative easing.
Trade war concerns resurfaced overnight when news broke out that the United States will announce tariffs on further $200 billion of imports from China with levies of 10% on the products. China said it was “shocked” by the news and that it will have no choice but to retaliate, adding that the actions “were hurting China, hurting the entire world and hurting the United States itself.”
While the Federal Reserve has grabbed all the headlines for raising interest rates lately, its neighbor to the north has actually been just as aggressive in tightening policy over the last year. The Bank of Canada has raised its benchmark interest rate three times since the start of last July, and if economists are correct, another hike is likely at Wednesday’s meeting.
Uncertainty is usually bad. But with regards to the resignation of David Davis, market participants think it may actually be a good thing as far as the pound is concerned. The Brexit secretary resigned after the UK Prime Minister Theresa May forced through a new “soft Brexit” strategy she intends to present to the cabinet at Chequers.
U.S. investors, out celebrating July 4 holidays, didn’t miss much at all yesterday in the markets. They are back today and with them, volatility is set to return. In fact, European stock markets have started sharply higher this morning although the forex markets have been fairly quiet so far as investors await key U.S. data releases later on in the afternoon, which should provide us vital clues about Friday’s key employment report. Depending on the outcome of today’s data, the dollar could start to move more meaningfully ahead of the jobs report on Friday.