Daily Market Pulse

Dollar quiet ahead of CPI data

7 minute read


The positive move in risk sentiment observed mid-week makes it tough for the dollar to continue outperforming its rivals. The U.S. dollar index retreated this morning after closing 0.24% higher yesterday as investors await the Consumer Price Index (CPI) data from the United States. Meanwhile, market participants expect another 50 basis point rate hike at the forthcoming Fed meeting in June. The annual inflation rate in the United States is anticipated to have dropped to 8.1% in April, from a 41-year high of 8.5% in March. It would be the first reduction in annual inflation in seven months, owing to a drop in fuel and used car prices from March to April and the fading of last year's base effects. Despite the projected April downturn, inflation is unlikely to return to pre-pandemic levels anytime soon and will remain above the Fed's 2% target for a long time as supply disruptions linger and oil and food costs remain high. In other news, the U.S. Treasury bond yield continues to fall below 3% early Wednesday, while U.S. stock index futures show slight increases.


The Euro closed 0.30% lower in the previous session before reviving its momentum this morning due to favorable market sentiment. Meanwhile, the Eurozone ZEW Indicator of Economic Sentiment climbed substantially to -29.5 in May 2022, up from a two-year low of -43 in April. Inflation forecasts for the eurozone declined by 36.5 points to -10.6, while the indicator for the Eurozone's current economic position fell by 6.5 points to -35. In other news, European stock markets rose for the second day in a row as investors anticipated a critical inflation report to assess the impact of the Federal Reserve's attempts to control inflation in the world's largest economy.


The Pound sterling closed 0.13% lower yesterday followed by recovering its losses in the early Wednesday session as the market participants remain positive ahead of the release of U.S. consumer price readings. Meanwhile, domestically, the United Kingdom has intensified its warnings about the post-Brexit deal for Northern Ireland, claiming that the European Union's newest proposals on trading arrangements will not work and signaling its willingness to take unilateral action unless a fresh agreement can be reached. Elsewhere, the FTSE 100 traded slightly higher on Wednesday, in line with its regional peers, consolidating the prior session's rebound following the selloff at the start of the week, boosted by materials and oil & gas stocks following news of a drop in infections in Shanghai and Beijing, while investors awaited a key U.S. inflation gauge.


The Japanese Yen closed 0.12% lower in the previous session against the greenback before recovering its momentum this morning amid the sliding of the U.S. dollar. According to the most recent reports, the index of leading economic indicators in Japan grew to 101.0 in March 2022, up from 100.1 a month earlier, according to flash data. In addition, the index of coincident economic indicators in Japan, which includes data such as industrial output, employment, and retail sales, increased to 97.0 in March 2022 from 96.8 the previous month, the highest result since September 2019. The government lifted the quasi-state of emergency following a drop in COVID-19 infections and increased vaccinations. Elsewhere, in mixed trade on Wednesday, the Nikkei 225 Index increased 0.18%, while the broader Topix Index fell 0.6%, as investors sought out companies with positive outlooks while remaining wary of any upside surprise ahead of the release of U.S. inflation data.


The Loonie closed 0.12% lower in the previous session before recovering its losses on Wednesday morning amid a positive market mood. The commodity-linked Loonie rose as the U.S. dollar slipped ahead of the key release of inflation data as well as due to rising oil prices. Having said that, oil rose, with West Texas Intermediate futures trading near $102 per barrel. Also, domestically, the Canadian unemployment rate fell to a new low of 5.2 percent in March, adding to the Bank of Canada's case for more aggressive tightening in June. Simultaneously, Canada's annual inflation rate increased faster than predicted in March, reaching a 31-year high amid widespread pricing pressures. Moving forward, all eyes are on today's release of new U.S. inflation figures to gather insight into the central bank's likely future measures.


The Mexican Peso closed 0.03% higher in the previous session and continued to post gains on Wednesday morning supported by positive market sentiment. However, Mexican Peso is still pressurized amid global risk aversion due to concerns over aggressive tightening and renewed worries over China's economy and the ongoing war. Meanwhile, on the domestic front, Mexican headline inflation and the closely watched core index both climbed in April to their highest levels since January 2001, raising the prospect of a rate hike. Mexico's central bank raised interest rates for the seventh time in a row in March, to 6.5%, in an effort to reduce inflationary pressures caused by the Ukrainian conflict. Elsewhere, investors are waiting for the U.S. inflation gauge today as well as Banxico's interest rate decision tomorrow. 


The Chinese Yuan closed 0.05% lower against the greenback in the previous session. In the latest news, China's annual inflation rate rose to 2.1% in April 2022 from 1.5% in March, exceeding market expectations of 1.8%. This was the highest reading since late November when rigorous Covid-19 procedures caused logistical difficulties. Food prices increased for the first time in five months, with the rate of inflation (1.9%) reaching its highest level since October 2020. In other news, the Shanghai Composite gained 0.75% while the Shenzhen Component gained 1.8% on Wednesday, extending gains from the previous day, as Shanghai reported a 51% decline in new infections on Tuesday, while Beijing also reported fewer cases. 


Yesterday, Real managed to recover some of its recent losses, up 0.47% against the U.S. dollar. Recovery was supported by the correction of U.S. assets that had melted at the beginning of the week. The high volatility of the Brazilian currency would be prevalent in the coming sessions while the uncertainties are still great – all players are concerned about the issue of global growth amidst rising inflation. Meanwhile, the COPOM minutes meeting revealed results as expected. In the minutes, the monetary authority signals to continue with the monetary tightening cycle at least until June, in an attempt to curb inflation. Moving forward, the Brazilian Institute of Geography and Statistics (IBGE) will disclose the inflation for the month of April which the IPCA measures. The indicator should show slight deceleration but jump from 11.30% to 12.06% in the 12-month period – another record in history. 


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