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USD momentum fades after Fed testimony, PMI data

USD - United States Dollar

The momentum behind the USD has faded, with the world’s base currency giving up ground to all major counterparts, excluding the yen. Federal Reserve Chair Jerome Powell pulled back slightly from last week’s rhetoric and reassured markets that the central bank would not rush to hike interest rates.

Data showed that business activity in the manufacturing sector expanded in June, beating market expectations. The IHS Markit's Manufacturing PMI for the US rose to a new high of 62.6 in June, compared to 62.1 in May. Private sector businesses also had expanded activity in June, showing boosted orders thanks to the easing of COVID-19 restrictions across the country. The IHS Markit Flash U.S. Composite PMI Output Index posted 63.9 in June, down from 68.7 in May. While the rate of expansion slowed from the previous month, the number still signals a historically elevated rate of expansion in output across the private sector.

The two sets of PMI data are key markers in assessing possible ongoing inflation pressures. The dollar edged lower following the release of the numbers, with the US Dollar Index falling 0.25% to 91.53 at the time of writing.

Key Movers

The Eurozone posted more positive data on Wednesday morning as flash services and manufacturing PMIs came in better than expected. Both sectors showed an expansion, and the euro has benefited as a result. EURUSD climbed 0.21% to trade at 1.1964 at the time of writing.

There seems to be a turn in the tide for sterling over the course of the week as GBPUSD marched back towards the 1.40 handle in the run up to the Bank of England meeting on Thursday. Traders seem to have greater expectations for this meeting, with vaccinations still progressing well and inflation just above target. If Governor Andrew Bailey provides an upbeat message for the future of the UK economy, the pound could break the $1.40 handle against the US dollar. GBP was up 0.35%, trading at 1.3994 at the time of writing.

The Australian dollar continued to recoup losses suffered in the wake of last week’s post FOMC meeting. Given more measured messaging from Fed officials this week, we expect the AUD will maintain its recovery, slowly edging back toward 0.76 and 0.77. AUDUSD climbed 0.54% to 0.7591 at the time of writing.

Expected Ranges

EUR/USD: 1.1899 - 1.1967 ▲

GBP/USD: 1.3911 - 1.3999 ▲

AUD/USD: 0.7513 - 0.7598 ▲

USD/CAD: 1.2258 - 1.2383 ▼