The dollar claims the top spot of the major currencies for the 2021 performance, but can it play the role?

– USD spreads GBP, CAD et al in a clean swipe of the FX chart
– Temporarily become the best performing major currency of 2021
– In a context of global market risk aversion and pending Fed policy change
– Viruses, global economic risks and Jackson Hole key to the outlook

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  • GBP / USD reference rate at publication:
  • Point: 1.3672
  • Bank transfers (indicative guide): 1.3293-1.3389
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The dollar gave ground to the safe haven Japanese yen on Thursday, but also swept aside the board of all oppositions in a rally that tentatively placed it first among major currencies for 2021, although it remains to see if the greenback can continue to hold. the coveted coat.

Dollars were bought at almost every level ahead of the weekend, even briefly pushing the pound-to-dollar rate to a loss in 2021 alongside the Canadian dollar and thus swept this year’s top two contenders to the top spot among the main currencies.

Thursday’s losses in equity and commodities markets only served to put more wind in the sails of a resurgent dollar after minutes from the July Federal Reserve (Fed) meeting put the US currency to take center stage within hours, with a wide range of concerns cited by analysts.

But with the pound-to-dollar rate still at its 2021 opening level of 1.3672 on Thursday, and with USD / CAD not far above its equivalent of 1.2729, now everything depends on whether sentiment of investors towards the global economic outlook continues to crumble and for how long. the Fed’s tailwind is supporting the dollar.

“Markets are starting to integrate a global slowdown linked to COVID-19, supply chains and political concerns. It’s an environment where long positions in USD through high beta currencies such as SEK, NOK, AUD, NZD or CAD could also outperform, ”says Jordan Rochester, strategist at Nomura, who was recently a long USD / CHF and seller of EUR / GBP. “This is why we are adding to our long USD positions via the USD / NOK spot.”

GBPUSD daily

Above: US dollar index displayed at daily intervals alongside the pound-dollar rate.

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Any further deterioration in global growth expectations, for whatever reason, would be an almost infallible catalyst for the dollar to keep the pressure on the pound, Canadian dollar and such others, in the process of possibly claiming and consolidating its grip on the top spot. among the major currencies.

This means that there is also a lot to be seen as to whether financial markets are able to adapt quickly to uncertainties arising from new incarnations of the coronavirus, short-term shutdowns in economically important production industries and confusion in the economy. geopolitical arena.

Coronavirus outbreaks continue to disrupt major global manufacturing centers in Asia, threatening further shortages of goods and a longer but transient brush with inflationary pressures across the globe.

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However, the longer-term and more lasting influence for the dollar and the wider currency market must cope with the looming change in Fed policy.

“In the short term, the Fed and COVID-19 are the main factors for markets to watch – especially in judging whether Delta is succeeding in weakening the vaccine wall. But there are other things to consider in September and the fourth quarter, ”says Rochester de Nomura. “Electoral pressure is in the pipes, with the potential for surprises in Germany, Japan and Canada. The ECB could reduce its purchases of PEPP, US debt limits could be a risk, or it is more likely that US infrastructure spending will eventually be agreed. “

Wednesday’s Fed minutes showed that a majority of Federal Open Market Committee members were of the opinion at the July 27-28 meeting that if the U.S. economy grows according to the June forecast in the Meanwhile, the necessary conditions would be in place for the Fed. to begin the process of winding up its $ 120 billion monthly quantitative easing program before the end of the year.

Dollar rate

Above: USD / CAD displayed at daily intervals alongside the US dollar index.

Wednesday’s minutes came as a surprise to a significant number of analysts and other commentators given previous expectations that the Fed would announce something in September or November, for implementation in the new year.

This has the potential to remain a defender of the dollar, especially if investors continue to perceive it as something that has a big impact on the U.S. bond market or that advances the timing of the Fed’s interest rate hikes.

But, as some analysts pointed out on Thursday, the risk to the dollar is that Fed Chairman Jerome Powell will use a much-anticipated address at the Jackson Hole Central Bankers Symposium next week to discourage financial markets from this opinion.

“Although the overall long USD position of the IMM leveraged funds in last week’s survey was not huge, we think it is important to note that the forex market is already long in USD” , warns Stephen Gallo, European head of foreign exchange strategy at BMO. Capital markets.

“With that in mind, we suspect that follow-up may start to be laborious at this point. And of course, there is always the risk that Fed Chairman Powell will use his Jackson Hole speech next week to correct the impression left by the minutes, ”adds Gallo.

Against this backdrop, it might be more notable for the dollar and any offer to retain the top spot among major currencies for the year which Wednesday’s minutes also made clear that “many participants” were keen to convey to the outside world that there is no such thing. as a “mechanical link between the timing of the reduction and the timing of a possible increase in the target range for the federal funds rate.”

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