Daily Market Pulse

Dollar set for a weekly advance


Risk-off was the theme across most markets on Thursday, but the U.S. dollar fell 0.35% following the disappointing data releases. The dollar was under pressure after data showed that U.S. consumer spending fell in May, the latest sign of slowing economic growth. The Fed-preferred core PCE price index also showed signs of easing prices in May, hitting a six-month low of 4.7% but remaining elevated. Meanwhile, the dollar index rose on Friday morning and was set to rise for the week, supported by the Federal Reserve's hawkish stance and rising risks of a global recession. Fed policymakers signaled this week that they are committed to lowering inflation even if it means risking a recession by raising interest rates by 75 basis points in July. Elsewhere, U.S. yields fell, with the 10-year yield falling to a low of 2.97%; equities also fell, with the S&P 500 falling 1%.


The euro recovered from a two-week low against the dollar on Thursday, after new inflation data showed that U.S. consumer spending rose less than expected in May. The common currency ended the North American session with 0.40% gains, reversing a decline caused by rising recession fears in the Eurozone and the energy crisis exacerbated by the Ukraine conflict. For the first quarter, traders will be looking at Eurozone inflation figures due on Friday, which may provide some insight into how aggressive the European Central Bank will be in raising interest rates. 


The pound gained 0.44% yesterday as the dollar declined, but it is losing ground on Friday morning in Europe. For the half-year, the British pound had a disappointing second quarter, falling more than 10% so far since the start of the year, marking the worst six-month performance since 2016. A general dollar strength, mounting recession fears, soaring inflation rates, and a fall in UK living standards have been acting as headwinds for the sterling. At the same time, investors are concerned about the central bank's ability to control inflation without severely harming the economy. The Bank of England has raised interest rates five times since December when it became the first major central bank to do so following the pandemic, and rates are now at 1.25%, the highest in 13 years. Nonetheless, the inflation rate has risen to 1982 highs, and the economy has already contracted 0.3% in April and 0.1% in March.


The Japanese yen benefited from selling pressure on the U.S. dollar yesterday, closing 0.64% higher before extending its gains today. Nonetheless, the yen was down 15% against the U.S. dollar in the first six months of 2022, the worst first-half performance for the currency since 2013. According to the most recent data, the Bank of Japan's index of big manufacturers' sentiment fell to 9 in the second quarter of 2022 from 14 the previous quarter, owing to rising input costs and supply disruptions caused by the Ukraine war and China's strict Covid lockdowns. In addition, Japan's unemployment rate unexpectedly rose to 2.6% in May 2022, exceeding market expectations and April's figure of 2.5%. In other news, the Nikkei 225 Index fell 1.73% on Friday, while the broader Topix Index fell 1.38% on Friday, extending losses from the previous session, as a slew of disappointing economic data in Japan weighed on market sentiment.


After gaining 0.16% on Thursday, the Canadian dollar appears to be losing steam this morning. The recent drop is due to the U.S. dollar's recovery as we approach the weekend. According to the most recent data, the Canadian economy will likely contract 0.2% month over month in May 2022, with declines expected in mining, quarrying, and oil and gas extraction, as well as manufacturing and construction. In April, Canadian GDP increased by 0.3% month over month, following a 0.7% increase in March and exceeding preliminary estimates of a 0.2% increase. During the month, growth was seen in 13 of the 20 industries, with higher output for goods-producing industries and slightly higher output for service providers. Mining, quarrying, and oil and gas extraction experienced a significant increase as the economy as a whole improved.


The Mexican peso fell slightly this morning after posting minor gains (0.05%) the day before. Investors are concerned about weak economic data and renewed concerns about the Bank of Mexico falling behind the Federal Reserve in terms of monetary policy tightening. Mexico's unemployment rate fell to 3.3% in May, compared to market expectations of 3.1%, while the country's merchandise trade account balance shifted to a deficit of USD 2.2 million, from a surplus of USD 0.39 million in the same month last year. In other news, following a Supreme Court ruling on Thursday, US immigration officials will be able to allow asylum seekers to enter the country from Mexico into the country while their cases are being processed.


The Chinese Yuan closed 0.09% higher against the greenback on Thursday. Despite a slew of upbeat economic data, the yuan edged lower against the dollar, remaining in a sideways trading range for the past two weeks, signaling China's economic recovery amid an easing Covid situation. Meanwhile, China's manufacturing and service sectors expanded for the first time in four months in June, as the government gradually lifted virus restrictions, reviving output and consumption. In addition, investors remained skeptical of China's strict zero Covid policy, fearing that the country is still vulnerable to lockdowns. In other news, the Shanghai Composite fell 0.32% on Friday, while the Shenzhen Component fell 0.28%, giving back some of the previous session's gains, as investors awaited market reaction to positive factory activity data from a private survey in China.


Brazilian currency failed to sustain gains on Thursday and led the losses in the forex market (0.59%). The narrative continues the same (strong dollar abroad, global recession, domestic fiscal risk...) - that are already sufficiently negative fundamentals for the Real. Meanwhile, it is worth highlighting the approval of the PEC on Fuels in the Senate that creates an aid of R$1,000 to truck drivers and aid still without a defined amount to taxi drivers, in addition to expanding Auxílio Brasil to at least R$ 600 per month and gas voucher to around R$120 every two months. The matter now goes to an analysis by the Chamber of Deputies. The impact of resources to fund these initiatives is estimated at R$ 41.25 billion, which will be left out of the expenditures and the fiscal results target of the Budget Guidelines Law of 2022


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