Daily Market Pulse

Dollar subdued after CPI figures


The U.S. dollar index remained weak on Tuesday, despite climbing 0.31% the day before, as investors awaited a major U.S. inflation report that might influence the near-term outlook for interest rates, as well as the Federal Reserve's policy decision tomorrow. On Monday, investors absorbed data revealing that consumer inflation expectations in the United States for the next 12 months fell to 5.2% in November 2022, the lowest since August 2021 and following a 5.9% reading in October. Money markets are currently pricing in a nearly 75% possibility that the U.S. Federal Reserve would raise rates by 50 basis points following four consecutive 75 basis point rises. Still, investors believe that if inflation gets entrenched, the peak for Fed funds will be higher than predicted.


The Euro is trading in a narrow range this morning after falling 0.03% yesterday. The common currency is supported by the dollar's decline as well as the most recent positive data release. Having said that, the ZEW Indicator of Economic Sentiment for the Eurozone rose to -23.6 in December 2022 from -38.7 the previous month, exceeding market estimates of -25.7. It was the highest number since February, reflecting the temporary stabilization of energy markets and the anticipated drop in inflation in the coming months. In other news, the ECB is anticipated to issue a 50-basis-point rate hike on Thursday amid concerns about an impending recession and signs that inflationary pressures are weakening.


The British pound held in mid-December, staying around its best level in six months, as investors looked ahead to major policy meetings later this week while digesting new economic data from the UK. The Bank of England is expected to announce a 50 basis point rate hike on Thursday, following a huge 75 basis point increase at the last meeting, which was the largest increase in borrowing prices in 33 years. On the economic front, the UK jobs report showed that the unemployment rate increased to 3.7% from August to October, while regular pay rose by a stronger-than-expected 6.1%, the largest increase since records began in 2001, discounting rises during the Covid period. According to figures released on Monday, the UK economy increased more than expected in October.


The Japanese Yen slid against the U.S. dollar as investors avoided placing big bets ahead of critical U.S. inflation data that might impact interest rate forecasts and the Federal Reserve's policy decision this week. Mana Nakazora, the chief credit strategist at BNP Paribas Japan, told Reuters that the central bank should amend a policy statement to give itself more leeway in adjusting interest rates. She urged that the BOJ convey that interest rates may move up or down based on economic conditions and that the "massive monetary easing" should halt. BOJ Governor Haruhiko Kuroda has repeatedly stated that the bank's huge stimulus must be maintained until the 2% inflation target is met sustainably.


The Loonie extended its gains from yesterday as crude oil prices rebounded, while the dollar remained weak ahead of inflation data. This morning, West Texas Intermediate crude futures rose toward $74 per barrel after rising more than 3% the previous day, supported by a stronger demand outlook from top petroleum importer China and the continued closure of the Keystone pipeline, which supplies Canadian oil to the United States. In other news, investors are keeping an eye on significant economic events this week, such as the U.S. inflation report today and the Fed's decision later in the week. Domestically, the ratio of Canadian household debt to income fell marginally to 182.4% in the third quarter of 2022, down from an upwardly revised record of 182.6% in the second quarter.


The Mexican Peso is gaining ground today after falling by 0.46% on Monday. Domestically, data released last week reveal that Mexico's annual inflation rate fell for the second month in a row, to 7.8% in November 2022, from 8.41% the previous month, falling short of a two-decade high of 8.7% in August and September, and market expectations of 7.93%. This was the lowest reading since May, owing to the influence of pre-Christmas sales and discounts known as "Buen Fin" on some goods and services. Traders are looking forward to Banxico's rate rise decision later this week. Banxico is anticipated to raise its benchmark rate by 50 basis points on Thursday, and investors will be looking for a hint of when the tightening cycle will end.


Today, the Chinese Yuan dropped sluggishly against the U.S. dollar as investors worried about mounting Covid cases in China and stricter curbs on the country's semiconductor industry imposed by the U.S. and its allies. Investors were also anticipating a critical U.S. inflation report on Tuesday, which might impact interest rate expectations, as well as the Federal Reserve's policy decision on Wednesday. Meanwhile, China's ambassador to the U.S. stated that the government would ease Covid limits further and welcome more international tourists in the "near future," signaling the country's continued transition away from its stringent zero-Covid policy and toward more pro-growth policies.


The Brazilian Real regained ground against the greenback, despite ongoing concerns over the probable fiscal and budget management of the new Brazilian administration. The Senate recently adopted a constitutional change to raise the government expenditure cap by 145 billion reais, which is less than the 175 billion reais initially requested, allowing for additional social aid. Fears that the new government will destroy fiscal balances and fuel inflation in Latin America's largest economy led Brazilian markets to plummet in November. Furthermore, the appointment of Fernando Haddad, a supporter from Lula's leftwing Workers' Party, as finance minister has revived market concerns that the new administration will adopt a looser fiscal policy. In this context, the bank's chief executive officer, Roberto Campos Neto, has cautioned that the absence of a credible budgetary plan will raise inflation expectations, raise market rates, and harm the economy.


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