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Inflation, economic growth and a bill worth $1.9 trillion

USD

The U.S dollar slipped on Tuesday by 0.38%, against a basket of major currencies as U.S. yields pushed back ahead of key inflation data. Inflation worries are gradually increasing with growth forecast upgrades and the passage of the $1.9 trillion U.S. stimulus package. Headline Consumer Price Index is expected to have risen by 1.7% year-over-year in February, while the core print is set to remain unchanged at 1.4% YoY. As expected, the U.S. House of Representatives voted on Tuesday to advance President Joe Biden's $1.9 trillion stimulus bill, clearing the path for the measure to be considered later today, when it is expected to pass. Looking ahead, a higher-than-expected inflation print would likely see Treasuries, equities, and currencies sell-off. 

EUR

The single currency enjoyed modest gains through yesterday’s trading session in response to a weaker greenback. However, further EUR’s gains were capped by a disappointing real GDP in the Eurozone, which fell by 0.7%, below the previous estimate of -0.6%. Meanwhile, European countries have continued to make steady progress in increasing their Covid-19 vaccination rates in recent weeks, with the eurozone delivering over a million doses a day, almost twice the rate at the start of February. Today, market players will digest recent numbers from France, which should provide some support to the EUR. Industrial production in France leaped by 3.3% month-to-month in January, breezing past the consensus for a 0.5% increase.

GBP

The Cable added 0.5% as the U.S. dollar retreated alongside yields, on Tuesday. Sterling continues to receive support from the fast U.K. vaccine rollout as the country is just behind Israel and the United Arab Emirates in terms of the total number of vaccination doses administered per 100 people in the total population. It is a quiet day on the economic calendar, with market participants expecting the RICS Housing Price Balance reading on Thursday. Therefore, today’s lack of notable data will leave the Cable to be influenced by the U.S. Consumer Price Index.

JPY

The Japanese yen was able to break a four-day sequence of losses against the U.S. dollar, printing gains of 0.35% on Tuesday. However, the bearish technical picture and economic fundamentals point to a little enthusiasm for the safe-haven Japanese yen. Japan’s Q4 real GDP growth was revised down to 2.8%, from 3.0% in the preliminary reading. Household Spending for January fell 6.1% year-on-year, its weakest reading in four months. At the same time, the vaccine rollout remains pitiful, by developed market standards. Therefore, the JPY may continue to struggle and be unable to get any help from Japanese numbers.

CAD

The Loonie jumped 0.18% against its rival U.S. dollar on Tuesday as a retraction in bond yields supported risk appetite. The benchmark U.S. 10-year yields dipped by 6bps, falling back below 1.55% while Canadian bond yields dropped to 1.448%. The Bank of Canada will announce its monetary policy later today, however, no changes are expected in the interest rates as the unemployment rate is still high. No press conference is scheduled for after the decision. Meanwhile, investors will also be monitoring the oil prices, as the U.S. crude oil futures gave back some recent gains in the last sessions. The recent rally in oil has been supportive of the Canadian dollar.

MXN

The Mexican Peso jumped 1.35% against the greenback despite higher energy prices as well as growing policy and financial risks, putting Mexico's central bank (Banxico) in a difficult spot. Data released yesterday showed that consumer prices in Mexico rose 0.4% month-to-month in February, pushing the year-over-year rate up to 3.8%, up from 3.5% in January. The main driver which pushed up inflation in February was a 2.5% rise in energy prices. Economists are expecting that Banxico will cut the interest rate by 25bp to 3.75% this month in order to provide a stimulus for economic growth. However, Banxico has limited room for maneuver in the short term, as inflation prospects are deteriorating.

CNY

The Chinese yuan rose 0.31% against the U.S. dollar on Tuesday, interrupting a three-day sequence of losses. Among the drivers that lended support to the CNY were (1) the U.S. Treasury yields pulled back and; (2) a likely reduction in Sino-U.S. frictions. The latter, a senior Biden administration official said on Tuesday that the United States was in talks with China about a possible "near-term" senior-level meeting between the two countries. On the economic front, Producer Price Index (PPI) inflation rose to 1.7% in February, from 0.3% in January, while Consumer Price Index (CPI) deflation moderated to -0.2% in February, from -0.3% in January. Going forward, it is expected that the PPI inflation will shoot up to about 10% mid-year due to higher commodity prices, and services prices should begin to push up the Consumer Price inflation in the coming months.

BRL

Yesterday, the Brazilian Real dipped 0.3% against the greenback, with investors assessing the potential candidacy of former leftist President Luiz Inacio Lula da Silva in the 2022 presidential election. This was after Supreme Courte annulled the criminal convictions against former-President Lula the day before. Against this backdrop, the sentiment which will prevail in the FX market in the next months and the next two years is the tension and uncertainty, with a polarized race between the two populist extremes until 2022. In addition, given Brazil’s high public debt, low-interest rates, and an uncontrolled Covid-19 pandemic, the view on the BRL is not so bright.

Quick Insights

USD: Inflation worries are gradually increasing with the passage of the $1.9 trillion U.S. stimulus package

USD: Inflation worries are gradually increasing with the passage of the $1.9 trillion U.S. stimulus package

EUR: France shows solid industrial production numbers

EUR: France shows solid industrial production numbers

GBP: Sterling continues to receive support from the fast U.K. vaccine rollout

GBP: Sterling continues to receive support from the fast U.K. vaccine rollout

JPY: The bearish technical picture and economic fundamentals point to a little enthusiasm for the safe-haven Japanese yen

JPY: The bearish technical picture and economic fundamentals point to a little enthusiasm for the safe-haven Japanese yen

CAD: The Bank of Canada will announce its monetary policy later today

CAD: The Bank of Canada will announce its monetary policy later today

MXN: Banxico has limited room for maneuver in the short-term

MXN: Banxico has limited room for maneuver in the short-term

CNY: A likely reduction in Sino-U.S. frictions

CNY: A likely reduction in Sino-U.S. frictions

BRL: A polarized race between the two populist extremes until 2022

BRL: A polarized race between the two populist extremes until 2022

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