Daily Market Pulse

The dollar down ahead of Powell’s testimony

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.23% higher followed by it losing its momentum modestly in Tuesday's European morning session. This follows the previous session's volatility where the greenback lost its upward traction in the second half, as traders awaited key U.S. inflation data to analyze the outlook for monetary policy. Meanwhile, the U.S. core Consumer Price Index (CPI), which is scheduled to be released on Wednesday, is estimated to have increased by 5.4% in December, the highest level in decades, up from 4.9% in November. Additionally, the benchmark U.S. 10-year yields surpassed 1.8% for the first time in over two years on Monday, owing to growing expectations of a more aggressive policy tightening by the Federal Reserve amid inflationary pressures. Elsewhere, Goldman Sachs anticipates the Fed raising rates four times this year and beginning its balance sheet reduction as early as July. Moving on, market participants anticipate further hawkish comments from Federal Reserve head Jerome Powell during his Senate testimony today. 


The Euro closed 0.22% lower against the U.S. dollar followed by regaining its pace and heading upwards during Tuesday's morning session. The Euro gained somewhat against the backdrop of a weakening dollar and ahead of European Central Bank (ECB) President Christine Lagarde's speech today. Additionally, the seasonally adjusted unemployment rate in the Eurozone fell to 7.2% in November 2021, the lowest since March 2020 and in line with market predictions. This also contributed to the upside of the currency. Meanwhile, figures released last Friday indicated that consumer price inflation in the Eurozone reached 5% in December, a record high and considerably beyond the central bank's objective of about 2%. Still, the ECB is expected to remain dovish, which should extend pressure over the common currency. Moving on, ECB president Christine Lagarde is due to speak today in the European morning session regarding the monetary policy outlook. 


The Sterling closed marginally lower, although it recovered its losses and continues to move upwards during Tuesday’s morning session. This follows the weakening in the U.S. dollar as well as strong consumer survey data. According to the British Retail Consortium (BRC), overall sales in November were 5.0% more than a year before, the largest annual gain since July and up from 1.3% in October. In addition, the report also mentioned that the sales of apparel and jewelry continued to dominate Christmas present shopping, while spending on food and drink remained stable despite concerns of Omicron. Elsewhere, UK Brexit Minister Liz Truss has set a friendlier tone than Frost in early talks and has asked Maros Sefcovic, the EU's Brexit commissioner, to a meeting on Thursday night, offering "positive solutions" to overcome the impasse. Looking forward, Brexit-related headlines and news from U.S. Fed Chair Jerome Powell’s testimony today will influence the Sterling prices further. 


The Japanese Yen closed 0.40% higher against the greenback on Monday. On Tuesday, the Yen attempted to hold steady against the U.S. dollar, holding onto gains from the previous session as the Japanese currency benefitted from a Fed-induced risk-off market. The Yen has also benefited from rising Samurai bond rates, with the benchmark 10-year Japanese Government Bond (JGB) yield holding above 0.14%, similar to March 2021 levels. However, the Yen stayed close to 5-year lows as Japan's and other nations' monetary policies continued to differ. While other central banks have expressed their willingness to tighten monetary policy, the Bank of Japan (BoJ) is largely likely to keep its ultra-easy policy since Japanese inflation remains considerably below the central bank's objective of 2%. Meanwhile, Japan's finance minister recently emphasized the importance of currency stability and said that he was constantly monitoring market movements and their effect on the economy. Moving ahead, Fed Chair Powell’s testimony will provide fresh momentum to Yen. 


The Loonie closed 0.28% lower followed by it regaining its uptrend modestly as it entered Tuesday’s European trading session. The Loonie is cheering the dollar decline and high crude oil prices while paying less heed to Omicron's worries. The West Texas Intermediate (WTI) crude oil prices gained 0.33% intraday at $78.25, ending a two-day loss, as market optimism weighs on the U.S. dollar's safe-haven demand ahead of important inflation data. In other news, the S&P/TSX, Canada's main stock index, traded around the flatline on Monday, as the day was defined by a global risk-off attitude spurred by growing fears that the Federal Reserve would go on with rate hike plans. Moving on, market participants will keep a watch on the covid updates for intermediate changes, but Fed Chair Powell's statement and the December U.S. Consumer Price Index (CPI) will be critical for clear direction.


The Mexican Peso finished 0.08% higher against the U.S. dollar and it continues to oscillate around two-month high levels during the European trading hours on Tuesday. In the previous session, the Mexican Peso weakened against the U.S. dollar, declining from a two-month high as Latam currencies fell and oil prices lowered. Meanwhile, prospects of increased U.S. interest rates are impacting investors' attitude, as the likelihood of the Fed raising the benchmark interest rate four times this year, rather than three, are increasing. In addition, traders are anticipating the release of U.S. consumer prices data on January 12th in order to examine more hints on the timing of policy rate hikes. Domestically, the quick spread of Covid-19 cases added to the dampening mood as the nation continues to register record-high daily Covid cases.


The Chinese Yuan closed 0.03% lower before gaining its upside momentum on Tuesday’s session. The onshore Yuan strengthened against the US dollar, boosted by healthy corporate demand, although predictions of a more aggressive monetary tightening by the U.S. Federal Reserve limited gains. Meanwhile, corporate demand for Yuan in the run-up to the extended Lunar New Year vacation is providing seasonal support for the currency. However, the currency remained under pressure as the Fed's hawkish signals pushed up U.S. Treasury rates, narrowing the yield difference between Chinese and U.S. 10-year government bonds and increasing the risk of capital outflows. Elsewhere, The Shanghai Composite slid 0.73%, while the tech-heavy Shenzhen Component fell 1.27% on Tuesday, as the recent market rebounce failed to find traction.


The Brazilian Real closed 0.45% lower against the greenback on Monday. The Brazilian Real traded down from a nearly 1-week high as Latam currencies fell and iron ore prices fell. Prospects of increased U.S. interest rates are impacting investors' attitudes and weighing on Brazilian currency. Furthermore, in Brazil, investors are waiting for the Benchmark inflation index (IPCA) for December, expected at 9.97% annually. Nevertheless, inflation is likely to stay at a six-year high, putting pressure on the central bank to maintain a hawkish policy stance with higher interest rates. In other news, the major Sao Paulo stock index, the Bovespa, fell 0.9% on Monday, following the turmoil in global markets.


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