After experiencing minor losses in the previous session, the U.S. dollar index climbed on Thursday, bouncing back toward its highest levels in 20 years as the Federal Reserve appeared focused on holding higher interest rates until inflation returns within the target range. Cleveland Fed President Loretta Mester stated on Wednesday that the fed funds rate would need to be raised "slightly beyond 4%" by early next year and remain there to reduce rising inflation significantly. Markets are presently pricing a third consecutive 75 basis point rate hike in September as investors await the monthly employment report on Friday to assess the labor market's resilience.
After eurozone statistics revealed that the annual Harmonized Index of Consumer Prices (HICP) climbed to 9.1% in August from 8.9% in July, the Euro managed to regain its ground and completed the day by clocking 0.39% gains. Early today, the common currency hovered above $1, maintaining close to 20-year lows as investors balance growth concerns and the chance that the European Central Bank may continue to raise interest rates quicker. Money markets now expect the ECB to raise interest rates by 75 basis points next week, up from just over 50% earlier in the week. On the other hand, fears of a European recession are growing as the energy crisis worsens, putting pressure on the common currency.
Following a 0.29% drop yesterday, the British Pound continued to tumble and reached its lowest level in almost two years on Thursday. The pound is struggling to find demand in the face of risk aversion and increasing interest in the Eurozone. Meanwhile, in the United Kingdom, the Nationwide House Price Index grew 10.0% annually in August 2022, down from 11.0% in July but beyond market expectations of 8.9%. After accounting for seasonal impacts, house prices rose 0.8% in August, marking the 13th straight monthly increase. Experts predict that the housing market will decline more in the coming quarters as household financial pressures increase. At the same time, the Bank of England is widely expected to keep hiking interest rates, which will have a cooling effect on the market if it translates into higher mortgage rates.
On Thursday, the Yen plummeted to its lowest level in 24 years versus the greenback as investors braced for broader interest rate differentials between Japan and the United States. The recent Yen weakness comes as hawkish remarks from U.S. Federal Reserve chair Jay Powell at the Jackson Hole conference weighed on markets, with increased expectations for a 75-basis-point rate hike at the Fed meeting next month. Meanwhile, the Bank of Japan has announced it will maintain its aggressive monetary easing program.
The Canadian dollar continued to fall this morning after falling 0.28% the previous day. The Federal Reserve's firm stance to maintain rate hikes and declining crude oil prices weighed on the Loonie. Meanwhile, the Canadian economy grew by an annualized 3.3% in the second quarter, falling short of estimates of a 4.4% expansion due to severe reductions in capital formation. Furthermore, early statistics showed that national output fell in July, indicating that the economy may be cooling faster than predicted. On the other side, hopes of slow growth figures are expected to provide some relief to the Bank of Canada's relentless monetary tightening journey.
The Mexican Peso has been downward in recent sessions, owing to the Fed's hawkish stance on raising interest rates. Meanwhile, Mexico's central bank lowered growth forecasts for 2023, citing geopolitical instability and a slowing of the US economy, the country's biggest export market. Governor Victoria Rodriguez warned of a complicated economic landscape and reduced the government's growth forecast for 2023 from 2.4% to 1.6%. Also, Banxico added that the likelihood of trade battles with the United States and Canada under the USMCA trade treaty introduces a new source of uncertainty and risk that could impair investment decisions in the country.
On Thursday, China's Yuan traded marginally higher versus the U.S. dollar, as the country's official guideline rate remained firmer than expected. The Yuan fell 2.2% against the dollar in August, its worst monthly performance since April, weighed down by a strong dollar, a slowing domestic economy, and market expectations of aggressive U.S. interest rate hikes. Investors also analyzed data from a private poll suggesting that Chinese factory activity unexpectedly dropped in August, emphasizing the country's challenging route to recovery.
On Wednesday, the market reacted strongly to the Budget bill for 2023 forwarded to the National Congress for approval. The bill foresees a deficit of R$63.7 billion in the 2023 Budget, considering that there is no payment of the ¨Auxílio Brazil¨, a welfare program of R$600 – which was maintained at R$405. Real’s fall of 0.94% yesterday reflects concerns about a possible easing of the spending ceiling to accommodate the extension of emergency aid of R$600, an expense estimated at R$52 billion. As a result, corroborating this sentiment, the government's economic policy team prepares a proposal to create a public debt target, signaling to the financial market about the trajectory of public accounts and making the spending ceiling more flexible.