Daily Market Pulse

Higher than expected inflation figures push the dollar higher

7 minute read


The U.S. dollar index, which tracks the performance of the dollar against a basket of six major currencies, rallied 0.6% during yesterday’s trading session amid higher than expected inflation levels, challenging the narrative from Fed officials that inflationary pressures are transitory. Market participants expected headline inflation for June to be released at 4.9% whilst readings posted 5.4% year over year. Moreover, core inflation beat expectations, releasing 4.5% vs 4% previously anticipated. Despite the higher than expected figures, the inflation reports showed that the main drivers behind the June spike are reopening-related components such as car rentals, used vehicles, and airfares, among others which are expected to cool off as reopening anxiety eases by American households and seasonal summer drivers pass along. Jerome Powell, Chairman of the Federal Reserve, will testify before Congress, and we expect him to provide insights on the persistent rise in inflation and the bank’s possible intentions to taper stimulus based on persistent higher than expected inflation readings. However, Fed officials have expressed in the previous weeks that “substantial further progress” still needs to be made in the economy before pulling back stimulus, flagging a lag in the labour market.   


The common currency retraced 0.7% against the greenback following higher than expected inflation figures in the U.S. market, which bolstered the demand for dollars. The European Central Bank (ECB) is due to meet today to define the next steps towards the creation of the digital Euro. The President of the ECB, Christine Lagarde, said that the bank is looking to engage the exploratory face which is expected to take two years, and that euro-zone citizens could be holding the digital currency by 2025. Fears from policymakers are linked to financial stability, as customers could shift their deposits to the “safety” of the ECB in times of crisis - “A digital bank run”. Fabio Pannetta and other ECB members have acknowledged these risks and they are looking to implement possible limits for consumers to hold on the ECB and deeply negative interest rates to discourage these deposits. 


The British Pound fell 0.47% during yesterday’s trading session, amid higher than expected inflation results across the pond. Yesterday, the Bank of England (BoE) released the Financial Stability Report with opening remarks from Governor Andrew Bailey. The report showed that the Financial System has supported households and businesses throughout the crisis with promising results. Policymakers are aware that households and businesses will need further support from the system and that there are risks surrounding the U.K. in terms of economic recovery. The U.K. Banking system remains resilient, showing positive results in the stress testing analysis conducted by policymakers that proved its solvent capabilities in supporting the recovery of the economy. However, the BoE flagged that some asset prices looked stretched, driven by a growing risk appetite from investment funds mainly which have been instrumental in the performance of the economy. Today, strong inflation figures were released during the early hours of the session. showing strong headline inflation results beating expectations from 2.2% to 2.5% year over year. The Pound reacted positively to the data and we expect market participants to digest the data throughout the course of the day. 


The Japanese Yen retraced 0.25% against the dollar amid strong performance from U.S. inflation readings and covid woes, which continues to deteriorate the market sentiment as U.S. treasuries remain subdued. Japan fears supply-chain disruptions as coronavirus cases surge in the APAC region, affecting countries like Malaysia and Indonesia. The Japanese government has been criticized for insisting on holding the Olympics, especially as the nation struggles to control the virus and to roll out vaccination programmes in an efficient fashion. Moreover, the Japan Industrial Production figures that were released during early hours failed to impress market participants as reading posted 21.2% vs 22% expected, driven by a 6.5% contraction in May as market participants expected 5.9% contraction amid the latest impact of the coronavirus in the country which has forced authorities to declare a state of emergency in Tokyo.   


The Canadian Dollar edged 0.52% lower against the greenback as investors rushed to buy dollars after the U.S. posted higher than expected inflation figures and the slowdown from Crude oil prices removed support from the commodities linked Loonie. Later today, the Bank of Canada will have its monetary policy meeting followed by a press statement and interest rate decision. Market participants expect interest rates to remain unchanged, but CAD bulls suspect that policymakers will continue on bond purchasing tapering as we witnessed in Q2. Canadian economics has shown solid signs of recovery and successful transition off the pandemic, unlike other countries, which gives policymakers the advantage to consider easing down stimulus.    


The Mexican Peso fell 1.03% against the Dollar amid inflationary pressure in the U.S., which might spark adjustment in monetary policy and tapering sooner than previously anticipated. Additionally, job reports in Mexico show that the labour market still has a long way to go before the economy compensates for the 647k total formal jobs lost during the pandemic, but encouraging results in June suggest that the country is on the right track. Mexico’s Social Security Institute (IMSS) announced that almost 66k new jobs were created in June, showing a pick up from May of 0.3% and 3.5% higher than the previous year. However, the Mexican market has created over 400k formal jobs during the first half of the year which raises expectations that we might see figures above pre-pandemic levels before the end of the year. 


The Chinese Yuan remained relatively unchanged, with a marginal appreciation driven by PBoC setting USDCNY fixing lower at the opening. The inflation figures in the U.S sparked a broader dollar strength in the market which was offset by fears that further valuations of the Yuan could hurt Chinese exports and urge policymakers to intervene. The Index for Yuan’s trade-weighted basket rose to 98.45, the highest since 2016, flagging that figures above 98 could diminish Chinese exporters, and market participants also speculated that PBoC officials might intervene in order to achieve stability in the exchange rate. Today, Foreign Direct investment figures posted 28.7% year over year, failing to meet expectations set at 34.5% growth fromJune 2020.   


The Brazilian Real stepped back following the release of higher than expected inflation figures in the U.S. market, as investors bet on a potentially more hawkish stance from Fed officials. However the Brazilian Real regained traction during the course of the session as Brazilian coffee exports recorded new highs at 10.1% higher than the previous record in its 2018/2019 harvest. The record volume accounts for USD 5.84 billion in revenue, the highest in five years. The figures released by Brazil's National Council of Coffee Exporters (Cecafe) added to the demand for BRL, driving the price to recover from the earlier correction and closing the session 0.28% higher against the dollar. 


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