Dollar rises with monetary tightening in sight

23 Nov. 2021

The dollar's significant rally gained even more momentum last week after markets released their expectations for the Fed peaks, while the European Central Bank's extremely dovish communication kept the euro low.

Central bank policy has become the main driver in currency markets, and other news is normally ignored except when it affects expectations of future peaks. The pound gets a special mention, because it has held up better than other currencies. At the end of the week, it ended almost in line with the US dollar. The Turkish lira was by far the worst performer, as Erdogan forces the central bank to lower the exchange rate because the population is panicking about the currency selling.

While the national holiday of Thanksgiving in the United States usually causes slow markets, this year may be an exception. The U.S. Treasury is set to auction an unprecedented number of bonds, and it is uncertain whether the nervous bond market will be able to absorb this large supply easily after the recent bond sell-off and the 'hawkish' sounds from the Federal Reserve.

President Biden is expected to announce who he chooses as Federal Reserve Chairman before Thanksgiving and the PCE inflation report will be published on Wednesday. November data for Eurozone business activity will be released on Tuesday and will be the first to show the effect the latest news on COVID has had on economic confidence. This week is packed with news. Combined with the lower liquidity due to the U.S. holiday, this could create significant volatility. Below are the main currencies in detail.

Euro

The euro is falling further on the back of both the ECB's negative reaction to expectations of a price spike and the negativity surrounding new COVID lockdowns. The PMI index due out this week will cushion some of the impact on economic confidence and will therefore be closely watched in the markets. The news has not worked in favor of the general currency, but after the extreme sell-off of the past few weeks, it looks like too much has been sold and the lowest point has been reached, if ECB spokespeople do not appear too alarmed by the COVID situation this week.

British Pound

The pound has managed to finish level with the US dollar this week, meaning it has risen against other G10 currencies and almost all other major currencies in the world. Positive news from retail and labour markets has reinforced expectations for a share price appreciation before the end of 2021, which is in stark contrast to the extreme'dovish' attitude of the ECB. PNI reports and speeches from the Bank of England's MPC members could underpin such expectations this week.

U.S. Dollar

'The noises of government officials last Friday were free'hawkish', suggesting that the gradual tapering is accelerating and that the Federal Open Market Committee is increasingly concerned about the inflation data. In addition to Wednesday's PCE inflation data, just before Thanksgiving, the auctions of government bonds on Monday and Tuesday will be essential to chart market demand for further U.S. debt, in the face of high supply, less support from the Federal Reserve and negative real interest rates. The minutes for the Federal Reserve's last meeting and Biden's choice of the next Federal Reserve chairman, where he is expected to re-elect current Chair Powell, or the yet-to-be-'DovisherCandidate Brainard, will result in an unusually full agenda just before Thanksgiving.

By: Enrique Diaz-Alvarez

Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.

About Ebury:

Ebury makes international markets more accessible with tailored foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:

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Frank Knopers

Economic News

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