Daily Market Pulse

The dollar down after hot inflation data

8 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, came under intense selling pressure, closing 0.69% lower following the release of U.S. inflation readings on Wednesday trading session. The U.S. Bureau of Labor Statistics reported that the annual Consumer Price Index (CPI) increased to 7%, marking the fastest rise since 1982, matching market expectations. Following a loss of more than 0.6% in the previous session, the U.S. dollar is struggling to rebound and has continued to drift down this morning. The scorching inflation data failed to bolster the dollar since it was in line with forecasts and had been fully priced in by markets. Additionally, the Federal Reserve’s head, Jerome Powell, disappointed hopes for a more hawkish stance in Congressional testimony earlier this week. Both factors in turn undermined the greenback. Elsewhere, U.S. stock futures were stable on Thursday, after a small increase in the major averages the previous day despite soaring inflation figures. Moving forward, traders are awaiting the release of the December producer price index and initial jobless claims during the North American session. This, along with Fed Governor Lael Brainard's testimony on her nomination as Vice Chair and the U.S. Treasury yields will provide fresh impetus to the dollar prices. 


The Euro closed 0.66% higher against the U.S. dollar and continued to move upwards as the European trading session began on Thursday. The currency increased to its highest level in five weeks amid broader dollar weakness, as inflation data came in line with expectations, raising market concerns that the Fed's hawks would have less ammunition at their next meeting. On the other hand, the European Central Bank (ECB) is perceived as being slower to tighten monetary policy than other major central banks, which limited upward gains for the Euro. Meanwhile, industrial output in the Eurozone increased by 2.3% in November 2021, returning from three consecutive months of decline and substantially above market estimates of 0.5% growth. Looking forward, a slew of officials from the European Central Bank (ECB) and the Federal Reserve (Fed) are scheduled to speak on Thursday, ensuring a busy day for Euro traders. Additionally, the December Producer Price Index (PPI) and weekly unemployment claims in the United States, as well as the European Economic Bulletin, will influence currency movements.


The Sterling closed 0.47% higher followed by it extending its rally in the early European session on Thursday. This marks the third consecutive day gain for the British Pound after a short pullback earlier this day. The momentum was fueled by the continued selling pressure on the U.S. dollar after the release of the U.S. CPI data. In contrast, the likelihood of UK Prime Minister Boris Johnson resigning is increasing, as a result of pressure from inside the Conservative party after an admission that he attended a party at a period when gatherings were illegal in England. This might function as a headwind for the British Pound ahead of Thursday's pivotal Brexit negotiations. Elsewhere, the FTSE 100 was barely changed on Thursday, tracking its European rivals, as investors assessed the potential for monetary stimulus and inflationary threat. In the absence of any significant market-moving economic data from the UK, traders may look to the U.S. economic calendar to influence Sterling prices further.


The Japanese Yen closed 0.57% higher and continues to strengthen with tepid losses on Thursday morning. The Yen strengthened from a five-year low as recent U.S. data releases were mostly as per expectations and priced in already, causing traders to unwind hawkish bets on the U.S. rate’s outlook. Meanwhile, the Japanese currency remained under pressure due to the divergence in monetary policies between Japan and other major countries, as the Bank of Japan is anticipated to maintain its ultra-loose monetary policy in order to promote economic recovery. Elsewhere, the Nikkei 225 Index fell 0.96%, while the broader Topix Index fell 0.68% on Thursday, as investors expressed concern after Japan's daily Covid cases surpassed 13,000 for the first time in over four months on Wednesday, owing to the rapidly spreading Omicron variant. Moving forward, traders are now anticipating the U.S. economic data and broader market sentiments to influence Yen prices further. 


The Loonie closed 0.52% higher followed by it continuing its uptrend on Thursday’s morning session. The Loonie touched an eight-week high against a lower dollar and rising oil prices. The dollar index fell as the CPI data revealed that annual inflation in the United States was in line with projections, allaying worries that the Fed might be forced to pursue more aggressive tightening policies. Additionally, Federal Reserve Chair Jerome Powell shattered market expectations for a more hawkish stance on January 11th. While he acknowledged that the U.S. economy was prepared for higher interest rates and quantitative tightening to battle inflation, he said policymakers were still discussing how to reduce the Fed's balance sheet, a process that might take up to four meetings. Meanwhile, West Texas Intermediate (WTI) Crude oil prices, a significant source of revenue for Canada, remained over $82 per barrel. Elsewhere, the S&P/TSX Composite Index climbed 0.6% on Wednesday, its highest level since November 25th, boosted by energy equities and a less hawkish stance from the Federal Reserve. Moving on, U.S. economy data release and oil price dynamics will be critical for a clear direction going forward. 


The Mexican Peso finished 0.12% higher against the U.S. dollar, although it faces volatility and attempts to remain steady at two months high levels during the European trading hours on Thursday. This comes on the heels of the dollar's recent weakness as a consequence of the Fed's less aggressive posture and expected inflation findings. Additionally, the Peso is strengthening as a result of surging crude oil prices. Meanwhile, the Mexican central bank, generally known as Banxico, voiced concern over inflation and high salaries in its most recent meeting minutes. Members of Banxico said that predictions for inflationary pressures had been increased even higher, particularly for 2022. Additionally, the 22% minimum wage increase agreed upon by the Mexican government and industry organizations might exert upward pressure on labor prices. Elsewhere, the fast spread of Covid-19 infections has eroded public confidence as the nation continues to register record-high daily instances. Moving forward, the publication of U.S. economic data and broader market sentiments will be critical for the Peso’s movement.


The Chinese Yuan closed 0.16% higher against the U.S. dollar on Wednesday. On Thursday, the offshore Yuan held at two-week highs against the greenback, maintaining recent gains as the greenback fell further after the release of U.S. inflation data that met expectations as predicted. Markets have essentially priced in recent inflation data reports, pushing traders to reverse bullish bets on the U.S. rate hike outlook. Meanwhile, the Yuan's gains have been restrained by mounting fears about a Chinese economic downturn. Fears of a Covid-induced economic slowdown and lower-than-expected inflation figures increased the possibility of more policy easing, putting downward pressure on the currency. Meanwhile, the People’s Bank of China (PBoC) is expected to announce more easing measures to assist in economic growth, although economists anticipate that it is likely to prefer injecting more cash into the economy over dramatically slashing interest rates.


The Brazilian Real closed 1.07% higher against the greenback on Wednesday.  During the previous session, the Brazilian Real reached its highest level since November 16th, boosted by a lower dollar and stronger-than-expected inflation figures, which bolstered the case for higher interest rates in Brazil. The U.S. dollar index fell as the CPI data revealed that annual inflation in the United States was in line with projections. This in turn strengthened the Brazilian currency. Meanwhile, inflation in Brazil increased 10.06% in 2021, above market estimates of a 9.97% rise and far beyond the central bank's target range. Additionally, a poll released on Wednesday indicated that former leftist President Luiz Inacio Lula da Silva would receive 45% of the vote, compared to 23% for far-right President Jair Bolsonaro, if elections were held that day, as voters express concern about high inflation and the resurgence of the Covid-19 pandemic in the country. 


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