Dollar Weakens as Traders Await Trio of Central-Bank Meetings

  • Losses vs Canadian dollar, yen outweigh gains against pound
  • FOMC expected to hike, outlook beyond this week seen as key

The dollar saw modest losses late in the day as earlier gains were undone by a surge in the Canadian dollar that was spurred by hawkish Bank of Canada comments.

Flows were mostly subdued as traders braced for a trifecta of central-bank meetings this week, spearheaded by the Federal Reserve decision on Wednesday. Other rate decisions will follow from the Bank of England and the Bank of Japan. While the Fed is expected to raise rates by 25 basis points, the BOJ and the BOE are forecast to stand pat. Of concern to markets is the Fed policy outlook beyond this week, as a still-subdued inflation picture appears to be at odds with the central bank’s goal of raising rates three times this year. Read more in our Research Roundup: Fed Seen Taking a Breather After Wednesday.

  • USD/CAD fell to its lowest in almost two months at 1.3322 as Bank of Canada’s Senior Deputy Governor Carolyn Wilkins said the central bank is looking at the possibility of raising interest rates as the nation’s economic recovery picks up steam
    • “The hawkish nature of the speech is the first acknowledgment from the bank that the next move is likely to be a hike,” CIBC’s Avery Shenfeld said in a note
  • FX flows are again also focused on the pound, which remains on a defensive footing with losses vs all of its G-10 peers, setting a fresh low vs USD as it approaches the lowest since the U.K. election. The pound’s drop is led by losses against CAD and JPY, with the yen seeing some haven demand amid drop in global equities
  • GBP/USD fell to a fresh low for the day, dropping to 1.2639, within striking distance of its Friday low at 1.2636 seen in the immediate aftermath of the U.K. election. PM May was said to tell Tory lawmakers she will get the government out of the mess created by the loss of majority and that she will stay as long as they want her
  • The pound again approached technical support at its 100-DMA 1.2621 and its 200-DMA 1.2575 just a week before the U.K. is to begin formal Brexit negotiations with the EU. GBP is seen as a preferred “sell-on-rallies,” according to traders, though the prospect of a so-called softer Brexit may eventually support the currency if it comes to fruition, traders said
    • GBP/USD and EUR/GBP are both trading around their 233-day moving averages of 1.2655 and 0.8594, respectively
  • USD/JPY fell to a new low for the day at 109.63, undercut by a drop in Treasury yields from session highs while also showing its sensitivity to equity flows, with a second day of declines in tech stocks dragging the Nasdaq Composite down as much as ~1.6%
  • EUR/USD orbited 1.1200, rising to a fresh high at 1.1232 early in the day before dropping back to a new low at 1.1192, slightly extending its 35-pip overnight range while delivering no compelling directional signals
    • EUR was supported slightly after France parliamentary elections held Sunday signaled that newly minted President Emmanuel Macron’s Republic on the Move party seemed likely to gain a majority in next week’s final round of voting
    • While the political outlook has helped underpin the shared currency, ECB executive board member Benoit Coeure confirmed that policy makers are moving very slowly toward an exit from bond buying, though inflation is still too subdued to discuss tapering; “we’re not there yet,” Coeure told Bloomberg in an interview
    • Offers to sell EUR continue to line the path from 1.1270 up to 1.1300, encompassing technical resistance from the recent highs ~1.1285; bids to buy EUR are in place below 1.1130, traders said
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