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US dollar retreats as pace of tightening reassessed

Monday 27 June, 2022

Daily Currency Update

Demand for the US dollar weakened against a basket of major currencies on Monday as investors awaited a busy week of US data in focus. Thursday’s Core PCE price index will be watched closely for signs of the Federal Reserve’s next move on interest rates. The reading is the central bank’s preferred barometer of inflation, which means market participants will watch the release closely for signs on whether the Federal Reserve’s aggressive rate hike projections are justified. A weak reading here, with comments from Jerome Powell last week that the global tightening of monetary policy maybe slower than first thought due to threats of global recession, could put currencies on the back foot. Especially those who have been inflated by interest rate hike speculation. The market will also closely watch Jerome Powell speak on Wednesday at the European Central Bank’s forum in Portugal, looking for any further rhetoric around recession and interest rates from the central bank chair. On Friday US PMI data will be released, an indicator of the economy and its output. With potential interest rate hike speculation, a weak reading here could again set back such speculation. After Powell’s comments last week, the market appears to have shifted towards pricing the start of a Fed easing cycle in late 2023. USDCAD was down 0.15% trading around 1.2870 at the time of writing.

Key Movers

EURUSD advanced above 1.0600 in the US trading hours on Monday, while GBPUSD also pushed above 1.2300 on the back of a broadly weakening US dollar. The S&P500 surged over 3% on Friday, adding to gains seen earlier in the week. Powell's admission last week that the risk of recession  mean that central banks may have to hold off from tightening monetary policy too quickly was good new for equities. This better equity environment may support the pound this week, which has been correlated to the stock markets and general risk appetite. Market participants will pay close attention to Wednesday’s speech by Bank of England governor Andrew Bailey. The UK central bank’s path of monetary tightening has been a little murky recently, with concerns over the UK’s ‘cost of living crisis’ making the central bank wary of putting interest rates up too quickly over concerns that doing so would push the UK into a recession.

Expected Ranges

  • EUR/CAD: 1.3587 - 1.3664 ▲
  • GBP/CAD: 1.5801 - 1.5864 ▲
  • AUD/CAD: 0.8905 - 0.8966 ▼
  • USD/CAD: 1.2869 - 1.2914 ▼