Daily Market Pulse

The jump in inflation reverses some of the dollar’s recent weakness

6 minute read


The U.S. dollar index, which tracks the greenback against a basket of its peers, was up 0.67% on Wednesday. In general, the jump in inflation reversed some of the dollar’s recent weakness as Treasury yields surged. On a month-to-month basis, Consumer Price Index (CPI) rose 0.8%, four times more than expected, and year-over-year, the CPI rate was 4.2% versus the 3.6% estimate. The latest reading point feeds into the narrative that the U.S. economy is overheating and the Fed is one step away from tightening. This sentiment also spilled over the stock markets, with the technology sector continuing to lead the retreat in equities, with Apple and Microsoft pacing a 2.6% decline in the Nasdaq 100. After closing at a record high on Friday, the benchmark S&P 500 dropped 2.14%.  Looking ahead, US jobless claims data is due later today and is set to attract attention as continued improvement is expected.


Yesterday, the Euro started the day under pressure after soft industrial production data in the Eurozone, and subsequently took a hit from a strong dollar demand, with investors reacting to the U.S. CPI data. As a result, the single currency fell 0.64% against the greenback. The output of factories, mines, and utilities across the bloc in March rose by 0.1% compared with February, nonetheless supply bottlenecks that halt activity in many sectors in the period are set to continue over Q2. However, the optimism about economic re-openings offsets the supply shortage and gives ammunition for the bulls. Looking ahead, market players will continue to digest the recent inflation reading from Germany amid expectations around potential interest rate hikes in the bloc.


The British pound slipped 0.6% against the dollar on Wednesday, more than any closing loss since April 30. In addition to the bearish effect that inflation in the US had on major currencies, renewed tensions over fishing rights involving France and the U.K. also weighed on the GBP. This stalemate recently resulted in the shipment of Navy ships by the United Kingdom and France. Now, the latest development is that France is threatening to hold up British access to European Union financial markets until the issue of fishing is solved. Looking ahead, the geopolitical tensions might continue to generate some noise in the background. At the same time, the U.K. government has been urged to accelerate vaccines in areas where case numbers are rising, ahead of the further relaxation of Covid-19 restrictions next week. In general, fundamentals are solid and favors the GBP.


The higher correlation between the Japanese Yuan and U.S. Treasury yields once more prevailed and the JPY had soured on Wednesday. The U.S. 10-year yield rose 7bp to 1.69%, hitting its highest yield this month, as a result, the JPY experienced a sharp decline of 0.97%. Domestically, the index of coincident economic indicators, which consists of a range of data including factory output, employment, and retail sales, gained 3.2 points in March from the previous month to 93.1. Although the market had ignored the figure, the latest reading signs that Japan’s economy is improving and rebounding from slumps caused by the pandemic. Looking ahead, the prospects for the JPY are gloomy due to renewed concerns that inflation in the U.S. could become too hot and the Fed would be forced to raise interest rates, consequently, it would keep yields going up.


The Loonie also ended Wednesday lower but it was the most resilient, losing 0.29% of its value against its U.S. rival. After the surging inflation in the U.S., market participants are now expecting that this price pressure will spill over into the Canadian economy and exert upwards pressure on local prices. Thus, Canada’s Central Bank (BoC) would be less permissive than the Fed and further tightening could be expected. Elsewhere, crude oil futures settling 1.23% higher at $66.08 a barrel over signs of a speedy economic recovery and demand hopes, did help to capped further CAD’s losses. Looking ahead, a speech from BoC Governor Macklem will highlight matters later today. Also, Canadian government bond yields surging, tracking the move in U.S. Treasuries, might provide extra support to the Loonie.


Yesterday, the oil-linked Mexican Peso weakened 1.19% against the greenback despite a sharp rise in crude oil prices, which were on track for eight-week highs on demand hopes. Local data, though positive, did little to revive the currency. Mexico’s industrial production grew 1.7% year-over-year in March, above market expectations of 0.6% and supported mainly by strong manufacturing output, which reflected the disappearance of temporary supply shocks (gas shortages in February and global semiconductor supply disruptions). Looking ahead, Mexico’s Central Bank will hold a monetary policy meeting later today to decide on the reference rate. Recent upside inflation surprises, amid the economic recovery, reduce the odds of the central bank implementing an additional rate cut.


The market saw a sharp Chinese Yuan drop (-0.42%) against the dollar on Wednesday, catalyzed by hotter-than-expected U.S. inflation which prompted market players to reassess their USD outlook. Meanwhile, overseas-listed Chinese companies buying dollars to make dividend payments also continued to weigh on the CNY. Looking ahead, investors and traders will continue to digest the recent U.S. inflation and its impact on the global market. Although the Fed has ratified that it would not start tapering its Quantitative Easing program, rising U.S. fixed-income yields narrow the differential rates with Chinese bonds, which puts additional pressure on the CNY.


Neither the international nor the domestic scenario helped the Brazilian Real on Wednesday. Firstly, a larger-than-expected jump in U.S. inflation raised concerns over early policy tightening, hence strengthening the USD. Secondly, the domestic services activity had a significant fall (-4%) in March for the first time in 10 months. As a result, the BRL retracted 1.63%, interrupting a sequence of five consecutive sessions of gains. Looking ahead, the pandemic situation is still dragging the BRL down, as the Covid-19 CPI advances in the Senate and the slow pace of vaccinations sparked a debate about further emergency aid measures. The latest official information from the Ministry of Health is that Brazil registered a daily increase of 2,494 deaths (2,311 on the previous day) and 76,692 confirmed cases (from 72,715). Elsewhere, a media survey on the voting intentions for the presidential elections of 2022 showed that former-President Lula (PT party) leads the race, with 41% of the votes, followed by President Bolsonaro, who has 23% of the votes. The poll is a clear indicator that Brazil will face the most polarized presidential elections of all time.


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