The U.S. dollar continued to fall versus its major rivals at the start of the week, weighed down by better market sentiment and dovish Fed predictions. The dollar Index fell to its lowest level in seven months yesterday (0.85%) but managed to post a modest recovery early Tuesday as some policymakers pushed back against the dovish fears. San Francisco Fed President Mary Daly projected that the central bank to raise rates to somewhere above 5%, while Atlanta Fed President Raphael Bostic believes policymakers should boost rates above 5% by early in the second quarter. Investors are now looking forward to Fed Chair Powell's speech at the Swedish Riksbank’s symposium for any comments on rate hikes and monetary policy.
On Monday, the Euro rose (0.81%) to its highest level since early June before losing its traction on Tuesday. The Euro has run out of steam amid a cautious market tone as investors wait for Fed Chair Powell's address later in the day. Meanwhile, in the Eurozone, the seasonally adjusted unemployment rate in November 2022 was 6.5%, steady from the previous month's all-time low and down from 7.1% in the same month last year. In other news, the Eurozone's annual inflation rate fell to a four-month low. However, excluding energy, inflation is at record levels, urging the ECB to continue its monetary tightening.
The Sterling nudged lower, moving down from Monday's two-and-a-half-week high versus the dollar as investors digested comments from a Bank of England policymaker. Huw Pill, Chief Economist at the Bank of England, cautioned of the potential of sustained inflation pressures from a tight labor market, even if natural gas prices stabilize or decline, stating that they will heavily impact his monetary policy position in the coming months. Following nine consecutive rate hikes, the Bank of England is expected to boost interest rates to 4% next month despite signals that headline inflation is slowing and the British economy is facing a brief recession.
The Japanese Yen drifted lower following the inflation report and the market's reaction to the Fed's hawkish concerns. The Tokyo Core CPI, a key inflation measure, rose above expectations and reached 4.0% in December for the first time since 1982. This was up from 3.6% in November and higher than the 3.8% predicted. The sources of the increase were food and energy prices, casting doubt on the Bank of Japan's premise that inflation is mostly owed to import expenses. The Bank of Japan claims that inflation is nearing a peak, yet inflation indices such as the Core CPI do not support that claim. Elsewhere, investors remain hopeful that the BOJ will loosen its cap further at its next policy meeting later this month.
The Loonie fell today as the dollar made a minor recovery. Nonetheless, the Loonie is supported by last week's domestic job figures. Moreover, the Bank of Canada has been put back in the hot seat with the release of better Canadian job data on Friday. According to TD Securities analysts, "another move this month is unlikely to resonate much with the CAD given where markets are valued. In other news, the oil market has been volatile, with Brent hovering around $80 and WTI at $75. This could limit Loonie's gains during the day.
After five days of gains, the Mexican Peso closed flat Wednesday as the currency neared a series of important resistance levels. According to CFTC data, investors upped their short Peso positions to 56,376 contracts in the week ending January 3, the most bearish since December 2021, prompting more pressure for Peso. Meanwhile, in recent data, Mexico's annual inflation rate increased somewhat to 7.82% in December 2022, up from 7.80% the previous month, but remains close to six-month lows and below market predictions of 7.86%. Consumer prices climbed by 0.38% month on month in December, the smallest increase in seven months and less below market expectations of a 0.43% gain. This could herald the end of the Bank of Mexico's rate hiking cycle, weighing on the Peso.
On Tuesday, China's Yuan rose against the dollar for the fifth trading day, reaching a new almost five-month high, boosted by investor optimism about the country's reopening. However, traders noted that gains were limited as the Chinese currency approached crucial resistance levels. Several corporate clients hurried to take advantage of the lower dollar and bought on dips. So far this year, the Yuan has risen roughly 2% against the dollar, reversing much of 2022's yearly loss, the largest in 28 years, supported by China's development hopes after Beijing loosened borders and removed Covid controls faster than expected.
Following the release of December inflation figures by the Brazilian Institute of Geography and Statistics on Tuesday, the Real has been volatile and trading in a tight range. The Extended Consumer Price Index (IPCA), which indicates official inflation in the country, climbed 0.62% in December, bringing the total increase to 5.79% by the end of 2022. This means that the IPCA was above the Central Bank of Brazil's objective for another year. Aside from inflation data, investors' interest in the domestic environment is still concentrated on the ramifications of the National Congress incursions. The acts were interpreted as a warning of political instability in Brazil, but the remedies provided by institutions to contain the situation were warmly accepted by investors worldwide, preventing further declines in Brazilian assets.