Daily Market Pulse

Dollar drifts lower after a five-day winning streak

6 minute read


Following a five-day winning streak, the U.S. dollar index moves south on Wednesday morning. Investors are looking forward to the minutes from the most recent central bank meeting, as well as important U.S. inflation numbers this week, which might confirm expectations for another large rate hike from the Fed in November. Meanwhile, according to the Federal Reserve Bank of New York's latest Survey of Consumer Expectations, consumers' one-year inflation outlook fell to a new 12-month low of 5.4% on Tuesday, down from 5.7% in August's survey. In other news, U.S. stock index futures are up 0.7% to 1.1% in the early European session, indicating an improving market mood. The Federal Reserve will now release the minutes of its September meeting during the late American session.


Following a 0.06% gain yesterday, the Euro clings to modest daily gains early Wednesday amid improving risk sentiment. Early stats show that industrial production in the Eurozone grew 1.5% month on month in August 2022, rebounding after a 2.3% decline in July and substantially outperforming market estimates of a 0.6% gain. Meanwhile, the EU is getting closer to proposing a temporary revamp of its electricity market by capping the price of gas used to generate electricity. Elsewhere, European equities sank for the sixth consecutive session on Wednesday, as optimism that the Bank of England will extend its support for the gilt market was outweighed by pessimistic views about the economy.


On Wednesday, the volatility of the British Pound increased due to conflicting indications surrounding the Bank of England's (BoE) emergency bond-buying program. The Pound has risen this morning as a result of reports that The Bank of England has confirmed its £65bn gilt buying program will end on Friday and may extend if required. Meanwhile, the UK's Office for National Statistics stated today that the Gross Domestic Product decreased by 0.3% month on month in August, following a 0.1% increase in July. During the same time period, Industrial Production fell by 1.8%, and Manufacturing Production fell by 1.6% respectively. Market players will be watching developments surrounding the BoE closely.


The Japanese Yen slid against the dollar today to its lowest level in 24 years and prompted Japanese officials to intervene in currency markets for the first time since 1998 last month. The Yen has been under persistent pressure as the Bank of Japan committed to ultra-easy policies to support a fragile economy, while the Federal Reserve of the United States rapidly hiked interest rates to battle runaway inflation. As a result, interest rate differentials have become even wider, with the benchmark 10-year U.S. yield trading approximately 375 basis points higher than its Japanese counterpart. Rising raw material and energy costs also impacted the Yen, forcing Japanese businesses to buy even more dollars to settle imports. Meanwhile, Finance Minister Shunichi Suzuki stated that the government will take the appropriate steps if necessary but that the rate of change, rather than the amount, is more essential.


The Canadian dollar is rebounding ground after falling 0.13% yesterday, owing to better market sentiment. Demand for riskier assets and technology shares has continued to fall ahead of the U.S. CPI reading on Thursday after Fed members underlined the importance of lowering inflation. In addition, WTI crude futures were trading near $89 per barrel as investors balanced a weaker global economic outlook against tighter OPEC+ supplies. The IMF has reduced its global economic growth prediction for 2023 because of high inflation, tighter financial conditions, Russia's invasion of Ukraine, and the persisting Covid-19 epidemic. Because there are no major economic releases, the Loonie is at the mercy of market moods and dollar movements.


The Mexican Peso fell 0.57% on Tuesday following two days of gains, dragged down by growth concerns that plummeted equities and commodities elsewhere. Investors are now waiting for the September U.S. CPI report, which is due on Thursday, for more clues on how active the Federal Reserve will be moving forward. The deteriorating macroeconomic background, especially poor growth projections in Mexico, suggests that the chances of a soft landing are fading. In addition to price data, the Fed and Banxico will disclose policy-setting meeting minutes this week. In today’s session, the Mexican Peso is somewhat recouping its losses as the dollar weakens. Still, the Peso is forecast to fall as the IMF warned of a gloomy prognosis, with one-third of the world economy expected to decline next year.


The Yuan maintained its current drop against the dollar, putting it at risk of additional devaluation to new record lows because of fears over rising Covid cases in China's rigorous zero-Covid approach, which clouded the economic picture. The IMF reduced China's economic growth predictions for 2022 and 2023 to 3.2% and 4.4%, respectively, blaming the country's Covid management. The currency also remained weak despite stronger-than-expected credit growth in September and Beijing's efforts to halt its decline, with the central bank recently asking state-owned banks to support the currency in offshore markets and introducing a slew of measures to discourage currency speculation.


Following Bank of England Governor Bailey's declaration that the BoE will discontinue bond market support, the Brazilian Real plummeted over 2% yesterday against the dollar, causing a risk-off trend across currency markets. This comes as Brazil posted its third consecutive month of deflation, easing pressure on the Brazilian Central Bank to raise rates while narrowing the yield differential between Brazil and the United States. Investors are also anticipating the outcome of the October 30 election between President Jair Bolsonaro and former President Lula da Silva. President Jair Bolsonaro's better-than-expected results paved the way for the right-wing party to win, giving investors some peace of mind.


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