The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, kicked off the week on the front foot amid a broader cautious risk sentiment. Uncertainty around U.S. inflation, China’s tech slash, covid woes, and infrastructure spending keeps the dollar in demand and advancing against most of its peers. Equity markets remain relatively unchanged amid the lack of risk appetite and cautiousness from investors after Friday's higher than expected producer price index figures ahead of Tuesday’s all-important release of the consumer price index. Philadelphia Federal Reserve Bank President Patrick Harker became another Fed member to back a tapering decision after the higher than expected Producer Price index figures were released on Friday last week. Upcoming inflation figures will be key for policymakers to start considering their votes for next week's Federal Open Market Committee, where Fed officials are expected to refrain from tapering their bond-purchase programme to make a move later in the year. Apart from inflation figures, Retail Sales and consumer morale figures are eyed. Moreover, U.S. infrastructure spending plans are a motive of concern for market participants as Democrats are divided on raising corporate taxes as conservative Senator Joe Manchin refuses to vote in favour of the USD 3.5 trillion bills.
The EUR remained subdued against the dollar amid the Fed tapering chatter and investors cautiousness ahead of key inflation data, keeping the market morale low key. Additionally, Center-left candidate Olaf Scholz solidified his position as the leader to inherit Angela Merkel after the third televised debate. He refrained from ruling out a coalition with the radical left, and that has weighed on the common currency as the week opens. Moreover, the European Central Bank announced last week the slowing down of its bond purchase programme, although the spokeswoman highlighted that it is only a “recalibration” and not a material change in policy. Coming up, Labor Cost and Industrial production readings are due on Wednesday for the bloc, while inflation figures are expected on Friday alongside current account readings.
The Pound Sterling remains under pressure against the dollar as market participants remain cautious due to tapering expectations in the United States. The U.K. Prime Minister Boris Johnson is set to announce changes to the country’s Covid policy as cases remain elevated. Moreover, the announcement of a National Insurance Contribution increase of 1.25% for employers and employees will see the fiscal backdrop become more of a drag on growth as support measures come to an end. Additionally, Governor Bailey mentioned that the New guidance of policymakers implied that conditions for a rate hike are now believed to be in place were necessary, although the ongoing uncertainty makes it difficult to adjust policy at this stage. This will be a busy week for GBP investors amid a busy economic calendar which will kick off on Tuesday with ILO Unemployment Rate and Claimant Count Change, followed by inflation reports on Wednesday and Retail Sales on Friday.
The Japanese Yen retraced 0.28% during the early hours of the trading session, amid U.S. treasury yields testing monthly highs. Higher than expected producer price index figures last Friday reshuffled tapering expectations and market participants eye upcoming headline inflation reports from the U.S. inducing a broader cautious mood. However, tapering expectations keep treasury yields on the front foot underpinning the greenback and any improvements on the U.S.-China relationship should continue to hit JPY harder than USD. Moreover, Producer Price Index figures released earlier today, weighed on the JPY as annualized estimates missed expectations posting 5.5% vs 5.6% previously anticipated. Coming up, on Tuesday the Industrial Production will provide a good peek at economic activity indicators while on Thursday the Trade Balance reading will provide useful input for investors.
The Loonie ended last week on the back foot as investors remain cautious over cracks in the global recovery and accentuated risks around the Delta variant. This week, the markets resumed activity in a cautious mood as the CAD remained relatively unchanged during the early hours of the trading session. However, the Loonie reacted to strong job reports which put into question the Bank of Canada's recent dovish hold in asset purchasing. Governor Macklem said that depending on data, there will be sentiment for a faster pace of tapering that could see the stimulus fully unwound by the end of 2021. Moreover, uncertainty around the election keeps the ground uneven for the currency, without clear direction. Neither of the Liberals or Conservatives is likely to secure a full majority in the house which keeps adding risks around the pair. However, Crude oil prices continue to edge higher providing support to the Canadian dollar, especially after Goldman Sachs economics said they anticipated a further appreciation of oil.
The Mexican Peso sustained pressure over the greenback amid sustained inflation which keeps policymakers on the verge of their seats hinting at further interest rate hikes in the country. However, The National Consumer Price Index showed that monthly inflation stood at 0.19% in August, while annualized inflation was released at 5.59% in July, exceeding the 3% +/- 1 inflation target set by policymakers. Policymakers highlighted that the annual inflation rate has decreased compared to July, recognizing that previous measures have contributed to controlling price behaviour, although headline inflation keeps being a cause of concern. Furthermore, this Thursday, Mexico will celebrate its independence day.
The Chinese Yuan steps lower amid broader demand for the U.S. dollar due to a cautious mood from market participants. However, last week, the Yuan advanced against the greenback due to U.S.-China talks which keep building expectations of an improvement of ties between both superpowers. Moreover, Chinese authorities also contribute to the cautious mood in the global market amid tech slash over tech giant Alipay. Chinese regulators are looking to break up the payments app and are looking to replace it with a separate platform to take over the app's profitable lending operation. Coming up, Retail Sales are due on Wednesday alongside Industrial production and NBS Press Conference.
The Brazilian Real had a volatile week amid protests during the country's independence day and mixed interventions from Jair Bolsonaro which kept the currency swinging strongly. Additionally, the latest inflation reports showed that the Consumer Price Index grew 9.68% annualized, the highest reading in two decades keeps policymakers concerned as the likelihood of further hikes increase. Policymakers noted that monthly inflation in August was driven by an increase in price in the food & drink (1.39%) and transport (1.46%) sectors, in particular, accentuated by the ongoing water and energy crisis.