Daily Market Pulse

Dollar hovers near 19 years high on hot CPI


The dollar closed 0.07% lower on Wednesday, although it regained momentum and edged higher against its rivals during Asian trading hours on Thursday. The U.S. dollar index firmed up, as U.S. inflation readings remained resilient oscillating around its multi-decade high, leaving the Federal Reserve on track to tighten monetary policy more aggressively. The headline Consumer Price Index (CPI) in the United States remained close to a 40-year high of 8.3% in April, while the core CPI came in above estimates at 6.2%, raising investor concerns that high prices will stay and might translate into further interest rate hikes. The data also suggested inflation may have peaked, although it is unlikely that it will ease rapidly and impede the Fed’s current tightening plans. Having said that, risk aversion has returned to the market, with U.S. stock index futures down 0.3%. Furthermore, adding fuel to risk aversion is the sinking cryptocurrencies. Coming up, Investors will see Producer Price Index data later in the day.


The Euro remains pressurized this morning after closing 0.15% lower yesterday.  In the most recent meeting, European Central Bank (ECB) President Christine Lagarde acknowledged that the disinflationary dynamics of the previous decade were becoming increasingly unlikely, and she reiterated that a rate hike could come a few weeks after the (Asset Purchase Programme) APP concludes early in the third quarter. However, hawkish comments from ECB officials on Wednesday did not help the common currency find demand. In other news, European equities fell after persistent U.S. inflation boosted the case for the Federal Reserve to tighten monetary policy more aggressively. The decline of cryptocurrencies also heightened risk aversion.


The Pound sterling retreated 0.13% yesterday and sustains pressure in Thursday's morning session amid board dollar strength. The Pound fell further to a new 2-year low, as investors worried about the likelihood of recession despite rising inflation. The British economy increased at a slower-than-expected 0.8% in Q1 and lost 0.1% in March alone, while the Bank of England (BOE) forecasts the economy to stagnate in Q2 and shrink in Q4. Simultaneously, traders increasingly believe the Fed would raise borrowing prices quicker than other central banks in order to contain skyrocketing inflation, but the BOE is perceived as having less capacity for tightening. Other UK data reported that Manufacturing Production fell by 0.2% in March after falling by 0.6% in February. In other news, the FTSE 100 fell more than 2% to levels not seen in eight weeks on Thursday, driven down by commodity-linked firms, as persistent inflation fears and disappointing economic data pushed investors to give up gains made the previous session.


The Japanese Yen closed 0.37% higher in the previous session against the greenback. The Yen advanced against the U.S. dollar on Thursday, breaking away from a 20-year low reached earlier this week, as U.S. Treasury yields fell dramatically on expectations that inflation may have peaked and a worsening global economic outlook. Meanwhile, the Yen remained weak as a Bank of Japan official stated that changing monetary policy with the aim of managing exchange rates was wrong, according to a summary of remarks at the April meeting. Elsewhere, in the equity markets, the Nikkei 225 Index sank 1.77% on Thursday, while the wider Topix Index fell 1.19%, finishing at its lowest in over two months as investors digested higher-than-expected U.S. inflation data for April.


The Loonie closed 0.27% up amid the positive market mood yesterday, however, the Canadian currency lost its momentum this morning as risk aversion is back in the markets. The Canadian dollar fell to its lowest level versus the U.S. dollar since November 2020, driven by a global dollar strength following a stronger-than-expected US inflation print in April, which bolstered expectations of further Fed tightening. Domestically, the Bank of Canada is expected to maintain its hawkish posture, due to the fact that Canadian unemployment set a historic low of 5.2% in April and annual inflation hit a 31-year high of 6.7% in March. In the stock markets, the S&P/TSX, Canada's major stock index, fell 0.3% on Wednesday, the lowest level in ten months, matching Wall Street's sharp declines. 


The Mexican Peso closed drifted 0.38% higher in the previous session before a slight pullback on Thursday morning. The Peso traded higher yesterday, ahead of the Mexican central bank's monetary policy meeting today, when policymakers are likely to raise the benchmark interest rate for the eighth consecutive time. Having said that, Mexican headline inflation and the closely followed core index both touched new highs in April, reaching levels not seen since January 2001. Mexico's central bank has already 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 Ukraine conflict. In other news, the government launched a six-month strategy last week to manage inflation by increasing the output of staple crops such as corn, rice, and beans.


The Chinese Yuan closed 0.18% higher against the greenback in the previous session. The Yuan fell against the U.S. dollar on Thursday, reaching its lowest level since September 2020, as China's central bank hinted at further monetary easing and a high U.S. inflation report strengthened predictions of fast Fed rate hikes. The People's Bank of China stated Thursday that it is prioritizing economic growth stability and will increase support for weak sectors, while also guiding lending interest rates lower from an already low level. Despite the severe drop in activity caused by Covid lockdowns, the central bank has made rather modest easing measures in recent months. In other news, the Shanghai Composite fell 0.12%, while the Shenzhen Component fell 0.13% on Thursday, consolidating a two-day gain, as investors awaited significant policy support from authorities following repeated pledges to boost growth and stabilize financial markets.


The Brazillian Real closed 0.78% lower in Thursday's session. In the latest news, Inflation in the country registered another record, the highest high in 26 years in April. Fuel and food prices spiral add even more pressure on Brazil's Central Bank to contain them. Having said that, the national statistics institute, IBGE, announced that inflation in 12 months to April rose to 12.13%, the highest since 2003 and well above the central bank´s target of 3.5%. As a result, the monetary authorities will remain concerned about the balance between economic growth vs. inflationary pressure. Furthermore, although high inflation may suggest further increases in the Selic (Brazilian benchmark rate), the Real should operate in the rear, assessing the impacts on the economic growth. Elsewhere, Bolsonaro's government took one more bold move in which the President replaced Bento Albuquerque with Adolfo Sachsida as head of the Ministry of Mines and Energy. The replacement took place after Petrobras ignored the appeal of the president not to raise fuel prices, which has become a big political issue ahead of his re-election bid in October. 


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