Daily Market Pulse

Dollar surges on hot inflation data


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.08% lower followed by regaining its momentum and moving higher on Friday morning on the back of strong inflation data. The U.S. dollar index fell to weekly lows on Thursday afternoon, marking a remarkable reversal after higher-than-expected U.S. inflation numbers sent the greenback higher earlier in the day. This occurred as market participants observed other central banks tweaking their monetary policies in order to combat inflation. Meanwhile, the annual inflation rate in the United States increased to 7.5% in January 2022, the most since February 1982 and significantly higher than market predictions of 7.3%. Surging energy costs, labor shortages, supply disruptions, and robust demand weighed heavily on the inflation rate. Meanwhile, St Louis Fed President James Bullard said that he would like a 50 basis point boost in March and that the Fed should raise its policy rate by 100 basis points by July. Expectations for excessively high-interest rates impacted stocks significantly. The Nasdaq Composite sank more than 2%, while the S&P 500 fell 1.8%. Moving forward, the Michigan Consumer Sentiment Index for February will be featured with the Federal Reserve's monetary policy report.


The Euro closed 0.03% higher on Thursday before losing its momentum and moving downwards on Friday morning. The Euro recovered some ground on Thursday amid a surprising drop in the U.S. dollar following the release of hot U.S. CPI data, as investors awaited a speech by European Central Bank (ECB) policymakers on the ECB's monetary policy outlook. Meanwhile, ECB President Christine Lagarde warned that rushing to tighten monetary policy may damage the economy's recovery from the pandemic. A rising number of ECB policymakers are losing faith in the institution's current inflation projection, which stands at 3.5% for 2022, allowing them to move more aggressively toward rate hikes. In other news, the Stoxx Europe 600 index fell more than 1% at the outset, with technology and real estate stocks leading the way. Moving forward, traders will be looking for data from the U.S. economic docket to drive Euro prices higher.


The Pound Sterling closed 0.16% higher yesterday before losing its ground and heading downwards this morning due to rising government bond yields. The yield on Britain's 10-year government bond has risen to more than 1.5%, the highest since November 2018, as investors prepare for a global rate rise. Meanwhile, the UK economy expanded at the greatest rate since World War II last year, despite a softer knock than projected in December.  The 7.5% growth rate was the highest since 1941, and Britain will be the fastest-growing advanced economy in 2021. Economists predict it will do slightly better than the Bank of England expects in the first quarter, leaving the door open for a rate hike in March. In other news, money markets are betting on 75 basis point rate hikes by May. BOE Governor Andrew Bailey and Chief Economist Huw Pill, on the other hand, have both resisted the notion, preferring a more gradual approach. They both agreed to raise interest rates by a quarter-point this month and further. Moving forward, Sterling is expected to erase its losses partially today on the back of robust GDP and strong industrial production data. 


The Japanese Yen closed 0.43% lower the previous day against the greenback. The Yen continued its downtrend against the U.S. dollar on Friday, hovering near a five-year low touched in early January. This comes as the investors battled with higher-than-expected U.S. inflation and hawkish comments from a Federal Reserve official, which reinforced bets on more aggressive tightening. Meanwhile, Bank of Japan board member Toyoaki Nakamura repeated on Wednesday that the BOJ will maintain its ultra-easy monetary policy in order to help the economic recovery and meet the 2% inflation objective. His remarks echoed those of other policymakers, emphasizing one of the more dovish attitudes among major central banks. He also stated that more steady currency fluctuations would assist Japan's economy, indicating growing dissatisfaction with the yen's volatility.


The Loonie closed 0.39% lower before consolidating its losses on Friday morning. The Canadian dollar lost value against the U.S. dollar as U.S. inflation in January accelerated to a 40-year high, clearing the door for the Federal Reserve to raise interest rates aggressively. Additionally, Loonie was held down as a critical U.S.-Canada trade channel was closed due to protests against Ottawa's pandemic measures, which strained automakers' operations. On the other side, rising oil prices, one of Canada's primary exports, put a cap on losses. Domestically, the Bank of Canada is planning to raise interest rates in the near future. If the Bank of Canada raises interest rates at its March meeting as expected, policymakers will disclose the pace of the country's first-ever quantitative tightening program and diminish the bank's balance sheet. In other news, Canada's main stock index, the S&P/TSX, fell 0.3% on Thursday, capping two days of gains as weakness in technology and industrials outweighed advances in the oil sector.


The Mexican Peso closed 0.46% lower yesterday, although it appears to have gained some ground this morning on the back of a rate hike by the Central Bank of Mexico. The Mexican peso fell yesterday after U.S. inflation reached a 40-year high, bolstering the prospects for Fed's rate hike. Meanwhile, Mexico's central bank (Banxico) hiked its benchmark policy rate by 50 basis points to 6% on February 10th, 2022, as expected. It was the sixth consecutive rise, reflecting concerns about inflationary pressures and predictions that the Federal Reserve will begin raising interest rates. Furthermore, the monetary authority stated that inflation risks remain weighted to the upside, with inflation expectations for 2022 and 2023 rising again, while medium-term expectations fell marginally and long-term expectations remained unchanged at levels above the target.


The Chinese Yuan closed 0.12% higher on Thursday. On Friday, the Yuan fell against the U.S. dollar, under pressure from widening policy divergence as impending rate hikes in the U.S. contrasted with monetary easing in China. Higher-than-expected U.S. inflation and hawkish remarks from a Federal Reserve member encouraged betting on a more aggressive policy tightening in the U.S. Meanwhile, the People's Bank of China recently reduced many major short- and medium-term interest rates, with experts anticipating additional easing measures in the coming months, including a 50 basis point reduction in the reserve requirement ratio. Former Chinese currency regulators have also cautioned that policymakers may take additional measures to keep the Yuan steady, potentially putting downward pressure on the currency.


The Brazilian Real closed 0.30% lower, after its three-day rally against the greenback. Real endured the external pressure after the U.S. posted hotter than expected inflation data and speeches from Fed members strengthened the case for rate hikes. Meanwhile, domestically, with the support of 32 senators, the PEC of fuels is a way to fulfill President Bolsonaro’s wishes. However, it encounters obstacles ranging from the presidents of the Senate and Chamber, the parliamentary opposition, and other government leaders. Elsewhere, the main stock index, Ibovespa, closed 0.8% up, a high not seen since October 18th, 2021. This extends advances for a third straight day, aided by commodity-linked sectors and banks going forward. It is worth following the IBC-Br Index for the month of December, which is seen as a preview of GDP. The index is expected to show growth of 0.5% for December. 


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