The loonie climbed amid broad US dollar weakness yesterday as markets were focused on the Federal Reserve’s policy statement, but the currency was trading on a weaker footing this morning after the FOMC’s gloomy economic forecasts triggered a risk-off move across markets. Crude oil prices pared back some of their earlier gains this morning after the US industry report signalled a surprise jump in crude oil inventories, sparking new concerns regarding oversupply. WTI is trading back around $38/b at the time of writing while Brent returned back to $40/b, both down around 5% since yesterday’s high. With the economic calendar being light for Canada today, global risk sentiment developments will be key in today’s price action for the loonie.
The dollar continued to weaken across the board yesterday as markets were waiting for the Federal Reserve to announce its latest decision on monetary policy. EURUSD was hovering around three-month highs in the buildup to the event as selling pressure around the dollar was mounting. The US published inflation data from May yesterday which printed worse than the initially forecasted reading, with the annual CPI printing at 0.1% while the core reading printed at 1.2%. With the focus being on the FOMC, the figures had no impact on currency markets. EURUSD erased gains from earlier in the day after the Federal Reserve announcement which sent a powerful message that the Fed will continue to keep credit flowing until the labour market has recovered from the harm of the pandemic and acknowledged it could take years to recover, pouring cold water over any hopes that arose after the last Non-Farm Payrolls report. The FOMC held its key interest rate near zero as expected, and forecasted to keep rates low through 2022. To sustain smooth market functioning, the FOMC stated it would increase its Treasury holdings and mortgage-backed securities. The Fed projected the economy to contract by 6.5% in 2020 and the unemployment rate to stand at 9.3% at the end of the year. The discouraging forecasts and confirmation of the US economy facing considerable risks over the medium term had the dollar trade up against the majors as a risk-off sentiment returned. Today’s economic calendar includes initial jobless claims that are expected to print at 1550K and are scheduled for release at 13:30 BST.
The euro was trading on the front foot against the dollar yesterday as markets were awaiting the Federal Reserve’s public announcement on its monetary policy decision. With no major macroeconomic data releases from the eurozone, the euro’s price action mostly stemmed from risk appetite. The pair erased gains after the FOMC’s announcement as Jerome Powell’s comments triggered a risk-off sentiment across currency markets. This morning, the set-back in risk appetite continued to send the euro higher while markets are awaiting the EU finance ministers meeting today who will debate the proposal for the jointly financed €750 bn stimulus plan. Even though the formal talks by EU leaders are only scheduled to start next week, today’s meeting may clear some of the air on the persisting disagreements within the EU. Focus remains on US jobless claims today as the economic calendar for the eurozone remains light.
Sterling was trading mixed against the G10 board, rallying against the US dollar while leading mild losses against the euro, but slumped after the US Federal Reserve signalled that it would take years for the economy to heal from the global pandemic damage, undermining global risk sentiment. While the UK and Japan continue their trade talks, Prime Minister Boris Johnson has also started talks with the US on how to proceed with trades after Brexit. The two sides disagree on several matters ranging from 5G to farm imports, but the finalisation of a comprehensive deal will only be achievable once the UK figures out its post-Brexit relationship with the EU. The UK further eased lockdown measures as single parents and adults living alone are allowed to mix in support “bubbles” from this weekend onwards. The UK Government continues to face criticism over its virus strategy, however, as Neil Ferguson, a specialist on modelling the outbreak, stated that if the UK had imposed a lockdown sooner, the death toll could have been halved. Johnson pushed back from the criticism and said that the UK is following the advice of its Scientific Advisory Group for Emergencies (SAGE), but with one of the highest death tolls in the world, the broad criticism over the UK’s response to the pandemic does not come as a surprise. With today being a light day on the UK calendar, the focus is shifted to risk environment and tomorrow’s economic data releases.