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U.S inflation figures amid Trump’s impeachment progress

USD

The U.S dollar index, which tracks the USD against a basket of major currencies, slid more than 0.5% on Tuesday, after a slide in the U.S Treasury yields raised concerns about the outlook for the U.S dollar against the backdrop of a looming U.S fiscal stimulus package. Although Trump’s impeachment progress has muted impact on the USD’s price, it sounds like background noise. Yesterday, the Senate affirmed the constitutional basis of Trump’s second impeachment trial, clearing the way for arguments to begin on whether he incited an insurrection by inflaming the mob that stormed the U.S. Capitol last month. On the economic front, the U.S inflation figures are due today, with the headline Consumer Price Index set to have risen by 1.5% year-over-year in January. Fed Chair Powell will speak on the labor market later today.

EUR

The softness seen in the greenback helped the Euro to gain territory, on Tuesday. The single currency edged up 0.6% as the dollar retreated alongside yields. The incoming Italian Prime Minister also helped the EUR to hold gains.  Today, Germany reported that the Inflation Rate grew by 1% year-over-year in January, matching the consensus and initial estimate. Also, industrial production in France fell by 0.8% month-to-month in December, undershooting the consensus for a 0.4% increase. Market players will pay attention to the U.S. Inflation Rate report which is projected to show that the Inflation Rate increased by 1.5% year-over-year in January. Meanwhile, European Central Bank President Lagarde will speak today in a newsmaker webinar organized by The Economist.

GBP

The Pound moved higher 0.55% against the U.S dollar for the fourth straight trading session on Tuesday as the quicker pace of vaccine roll-out is still lending support to the currency. At the same time, the risk-on market mood limited demand for the safe-haven U.S dollar, which led the USD to decline abroad. Investors and traders are looking ahead to today’s release of January’s latest U.S Consumer Price Index. If the U.S inflation confirms forecasts and rises, then USD could see some demand. Elsewhere, Bank of England Governor Bailey will give the annual Mansion House speech. If Mr. Bailey either paints a gloomy picture of the U.K economy or comments on negative rates – which the Bank effectively ruled out last week –, then the Cable would be put under pressure.

JPY

The Japanese yen printed sharp gains (+0.58%) against its rival U.S dollar on Tuesday. A combination of forces provided a meaningful impetus to the recent JPY’s rebound. First, the U.S posted a dismal nonfarm payroll last week, which raised doubts over a relatively fast U.S economic recovery. Second, there was better news on the Japanese manufacturing front, as Machine Tool Orders posted a third successive gain, with a read of 9.7%, where both foreign and domestic orders continued to increase. On the other hand, the progress in Covid-19 vaccinations supported the global risk-on sentiment, along with prospects that the Bank of Japan will maintain negative rates for a while, capped further JPY’s gains.

CAD

The Canadian dollar strengthened almost 0.4% against the U.S dollar for the third trading session in a row, on Tuesday. The CAD’s leap happened after oil prices extended their rally for a seventh session to hit a 13-month high, supported by supply cuts and optimism over a recovery in fuel demand as developed countries showed some progress in Covid-19 vaccination. Looking ahead, Bank of Canada Deputy Governor Timothy Lane is scheduled to speak later today, which could provide clues on the interest rate outlook. Some analysts expect Canada’s central bank to cut down its bond purchases shortly.

MXN

Yesterday, the Mexican peso recovered some lost ground (+0.07%) from the day before after annual inflation jumped faster than expected in January. The consumer price index in January rose 3.5% year-over-year, from 3.2% in December, due to higher oil prices, and despite the MXN rebound in recent months, the weakness of the economic recovery, and the worsening of the Covid-19 pandemic. Nevertheless, analysts believe that inflation pressure will ease in the next few months on the back of the worsening Covid-19 pandemic. Thus, Mexico’s Central Bank will be able to cut interest rates this week by 25 basis points to 4.0%, but it will be a tough decision.

CNY

The Chinese yuan traded up 0.15% against the greenback on Tuesday, with the pair hovering near the lowest level since June 2018. The CNY’s leap is due to positive China’s monetary supply data in January. The narrow measure of the money supply (M1), which covers cash in circulation plus corporate demand deposits, shot up to 14.7%, from 8.6% in December, while M2, a broad measure of money supply covering cash in circulation and all deposits, dropped to 9.4%, from 10.1% in December. These numbers all suggest that GDP growth in Q1 should continue to a peak as money and credit conditions re-loosened in January, after a worrying tightening in December. Looking ahead, investors will digest the recent inflation figures. The consumer price index (CPI) fell -0.3% year-over-year in January while the producer price index (PPI) picked up to 0.3% in the same month.

BRL

Inflation data in Brazil yesterday suggested that Brazil’s Central Bank (BCB) will keep interest rates on hold over the next few months. The January inflation (IPCA) came at 4.6% year-over-year, from 4.5% in December, and started the year within the BCB’s 3.75%±1.5pp target range. Although this is good news for the BCB, the FX market reacted negatively, with the Real closing 0.23% down against the U.S dollar. Moreover, the question about additional fiscal policy measures to support the economy is likely to remain an issue as more local stimulus means more public debt. Today, market participants will closely watch the December retail sales figures.

Quick Insights

USD: The Senate affirmed the constitutional basis of Trump’s second impeachment trial

USD: The Senate affirmed the constitutional basis of Trump’s second impeachment trial

EUR: The softness seen in the greenback helped the Euro to gain territory

EUR: The softness seen in the greenback helped the Euro to gain territory

GBP: The quicker pace of vaccine roll-out is still lending support to the currency

GBP: The quicker pace of vaccine roll-out is still lending support to the currency

JPY: A combination of forces provided a meaningful impetus to the recent JPY’s rebound

JPY: A combination of forces provided a meaningful impetus to the recent JPY’s rebound

CAD: The CAD’s leap happened after oil prices extended their rally for a seventh session

CAD: The CAD’s leap happened after oil prices extended their rally for a seventh session

MXN: Mexico’s Central Bank will be able to cut interest rates this week by 25 basis points to 4.0%

MXN: Mexico’s Central Bank will be able to cut interest rates this week by 25 basis points to 4.0%

CNY: The CNY’s leap is due to positive China’s monetary supply data in January

CNY: The CNY’s leap is due to positive China’s monetary supply data in January

BRL: Inflation data in Brazil yesterday suggested that Brazil’s Central Bank (BCB) will remain interest rate on hold over the next few months

BRL: Inflation data in Brazil yesterday suggested that Brazil’s Central Bank (BCB) will remain interest rate on hold over the next few months

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