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Dollar rallies as monetary tightening comes into focus

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22 November 2021

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The dollar’s blistering rally gathered speed last week as markets brought forward their expectations for Fed hikes, while the European Central Bank’s aggressively dovish communications hammered the euro.

strong>Central bank policy has become the main driver in currency markets, and other news are typically ignored except insofar as they affect expectations for future rate hikes. Special mention to the pound, which held off better than most, ending the week almost flat versus the US dollar, and the Turkish lira, which was by the far the worst performing currency as President Erdogan forces its central bank to cut rates in the face of near panic selling of the currency by locals.

Although the Thanksgiving holiday in the US usually makes for sluggish trading, this year may mark an exception. The US Treasury will sell an unusually large amount of bonds in auction, and it is not clear the nervous fixed income market will absorb this massive supply with ease after the recent sell-off in bonds and hawkish noise from Federal Reserve officials. President Biden is expected to announce his pick for Federal Reserve chair before the holiday, and on Wednesday the PCE inflation report is released.

The Eurozone indices of business activity for November are released on Tuesday, and will be the first read of the impact of recent COVID news on business confidence. The news-packed week, combined with the lower liquidity associated with the US holiday, could make for some serious volatility.


Sterling managed to eke out a flat week versus the US dollar, which means it rallied against the rest of its G10 peers and almost every other major currency worldwide. Positive news from UK retail sales and the labour market anchored expectations for a move up in rates before the end of 2021, which stands in sharp contrast with ECB ultra-dovishness. Employment actually increased in October in the first full month following the end of the furlough scheme, supporting our view that the fallout from the end of the programme is likely to be limited.

PMI reports and speeches from Bank of England‘s MPC members this week should underpin such expectations, and we are becoming quite positive on the prospects for the pound between now and the end of the year.


The euro continues to plummet on both ECB pushback against rate hike expectations and negativity around yet another round of COVID lockdowns. A handful of countries in the bloc have imposed fresh restrictions, notably in Austria that has announced a full nationwide lockdown lasting a maximum of 20 days.

The PMI releases this week will capture some of the impact on business confidence, and so will be closely watched by markets. Newsflow has not been kind to the common currency, but after the brutal sell-off of the past few weeks it looks somewhat oversold and may find a floor if ECB speakers this week do not sound overly alarmed by the COVID situation.


Federal Reserve officials made some hawkish noises late Friday, suggesting that the pace of the taper may accelerate and signalling that the FOMC is increasingly alarmed by inflation data.

In addition to the PCE inflation data on Wednesday, right before the holiday, the auctions of Treasury bonds on Monday and Tuesday will be key to gauge market appetite for further US debt in a context of massive supply, diminished Fed support and massively negative real rates. The minutes for the last meeting of the Federal Reserve and Biden’s decision on the next chair of the Federal Reserve, where he is expected to pick either current chair Powell or an even more dovish candidate, Brainard, will round out an unusually packed calendar right before the Thanksgiving holiday.

🎧 Listen you our latest FX Talk episode: Surprising central bank policies will shape the currency market.Your 20 min. financial market update.