Daily Market Pulse

The Dollar rises ahead of Fed meeting


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, surged 0.26% during Tuesday’s closing session. The US dollar is continuing to rise as investors prepare for both the Federal Reserve's meeting, and the Producer Price Index, which was announced on Tuesday, had increased by 9.6% annually in November, marking the largest increase in more than a decade. Meanwhile, it is widely anticipated that the Fed will continue to reduce its asset purchases amid rising worries about U.S. inflation. Elsewhere, the House of Representatives majority supported a $2.5 trillion federal debt limit increase to avoid Treasury Department debt defaults in the short term. Looking forward, market participants will keep the focus on the Fed meeting as well as November Retail Sales data, expected 0.8% annually, to provide further direction to the U.S. dollar.  


The Euro declined 0.22% against the dollar towards the end of Monday’s session. The common currency, after declining for two consecutive sessions, edges higher against the greenback, up 0.15% heading into Wednesday's European trading session. The modest comeback comes after the U.S. dollar’s retreat on Tuesday, which was triggered by a drop of 4% in the U.S. Treasury yields. Meanwhile, the European Central Bank’s (ECB) president Christine Lagarde mentioned that the Asset Purchase program is likely to continue until March 2022 under Pandemic Emergency Purchase Programme (PEPP) as comparatively worse Covid conditions in Europe hinder monetary policy tightening. Having said that, the Fed is considering doubling its monthly asset purchases and may complete it soon in order to announce an interest rate hike in 2022. Market participants will now get cues from the Fed's monetary policy decision for further direction.  


The Sterling rose 0.11% against the greenback during Tuesday’s closing. Sterling gained over the U.S. dollar on Wednesday, as inflation statistics raised fears about rising inflationary pressures in the UK ahead of this week's crucial Bank of England (BoE) and Fed meetings. Consumer price inflation in the United Kingdom surged more than predicted in November to 5.1%, the highest level since September 2011, while producer prices rose 9.1%, the highest level since September 2008. Nonetheless, the pound has stayed close to its lowest level since November 2020, as the Bank of England is expected to exercise prudence owing to the imposition of stricter COVID-19 restrictions in England due to the fast spread of the Omicron virus. Meanwhile, the U.S. Federal Reserve is likely to announce an acceleration of its bond-buying program. Elsewhere, Prime Minister Boris Johnson issued a warning about an Omicron "tidal wave" and urged an acceleration of the country's booster vaccination strategy after the UK raised its Covid alert level owing to an increase in cases. Looking forward, Market participants will closely watch the Fed’s decision along with Brexit as well as Omicron-related headlines to provide fresh direction to Sterling. 


The Japanese Yen fell 0.14% against the U.S. dollar on Tuesday’s closing session followed by extending its downtrend for Wednesday morning. The Yen attempted to bounce off from its intraday low levels this morning, however, the strength faded against the US dollar hawkish tone. This comes after Bank of Japan Governor Haruhiko Kuroda said that growing raw material prices may cause consumer inflation to surpass the 2% goal and the upward price pressures would continue to spread. On the other hand, Kuroda emphasized that the central bank's ultra-loose monetary policy will be maintained to promote greater salaries and a sustained economic recovery ahead of its planned meeting this week. The Bank of Japan (BOJ) will also assess whether to reduce pandemic-related emergency financing programs. Moving ahead, the Yen remains susceptible to omicron-related reports and the anticipation of more Federal Reserve policy tightening.


The Loonie declined by 0.43% against the greenback on Tuesday’s closing, followed by it extending its downtrend, touching the lowest levels since September while entering the European season on Wednesday. The latest weakness in the Loonie is linked to weakening WTI crude oil prices as well as cautious market sentiments ahead of Fed’s monetary policy meeting. That said, WTI crude oil prices dropped by 1% for the day and set at $69.33 amid the market uncertainty and growing concerns that supply growth will outstrip demand growth in the following year. Meanwhile, the Canadian Consumer Price index is due to be released today, expected at 4.7% annually in November. This along with U.S. retail sales figures are additional catalysts besides the Fed’s meeting today, which will provide further direction to the Loonie. 


The Mexican Peso declined 1.03% against the dollar during Tuesday’s closing. The Peso continues to slide further on Wednesday’s morning amid Omicron concerns and a cautious market mood ahead of the U.S. Federal Reserve monetary policy meeting. Meanwhile, economists anticipate that Peso will gain some demand due to the Christmas season, however, it will fade in the coming year due to domestic chaos as well as falling economic activity and looming supply chain dents. Moving ahead, market participants are waiting for the U.S. Federal reserve’s monetary policy decision, which is widely expected to tighten amid high inflations, to provide further direction to the Peso.


The Chinese Yuan gained 0.01% against the U.S. dollar at the closing of Tuesday’s session. The offshore yuan moved up modestly against the U.S. dollar on Wednesday, after the People's Bank of China injected 500 billion yuan into the financial system through its medium-term lending facility (MLF), but held the interest rates steady at 2.95% for the 20th consecutive month. The MLF injection coincided with the execution of a previously announced reduction in the reserve requirement ratio for banks, which released 1.2 trillion yuan in long-term funds. Meanwhile, investors absorbed conflicting economic data, with manufacturing production expanding faster than anticipated in November, up by 3.8% annually against estimates of 3.6%, while retail sales slowed, showing 3.9% against estimates of 4.6% in November. Looking ahead, the Yuan price dynamics will be influenced by the Fed's meeting during the North American session. 


The Brazilian Real declined 0.24% against the U.S. dollar on Tuesday’s closing. The BRL´s depreciation continues even with the Central Bank carrying out consecutive interventions to lend liquidity to the financial market and curb strong directional movements. Meanwhile, the minutes of the last Copom meeting indicated inflation above the target in 2022 and 2023, which leads to prospects that the Selic will continue to undergo new increases over the next year. At the same time, the Brazilian Institute of Geography and Statistics (IBGE) reported that the volume of services provided in the country fell by 1.2% in October, for the second consecutive month. Wrapping up the negative sentiment, the Fitch risk agency, reaffirmed the rating of Brazil's sovereign credit in foreign currency at ¨BB-¨ with a negative outlook. Elsewhere, the deputies want to prevent the government's default from becoming a snowball in the future, with the voting on the ¨PEC of Precatórios¨ which is set to continue today.


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