Daily Market Pulse

Dollar reaches 2003 prices ahead of FOMC


The U.S. Dollar index, a coefficient used to assess the performance of the greenback against a basket of six major currencies, rallied 0.32% during yesterday's trading session, reaching its highest levels since Q1-2003. The recent momentum on the greenback comes off the back of inflation readings refusing to pull back in the U.S. as price changes grew to 8.6% yearly raising serious concerns over the economy and throwing the market mood into a looming hole of recession expectations for next year. Stock markets and crypto-assets suffered the most recording severe losses across the board. Today, the Federal Reserve is set to announce its interest rate decision which is generally expected around 75 bps across different sources. However, Bloomberg estimates suggest that traders are expecting the upcoming rate adjustment to oscillate between 125 bps and 150 bps, way above the previous hike of 75 bps.


The Euro erased yesterday's losses during the early hours of today’s trading session amid news of the European Central Bank holding an extraordinary meeting to discuss current market conditions, inducing some hope of optimism as the pair trades close to key multi-decade level support. Industrial Production data will be featured in the European economic docket and ECB president Christine Lagarde is scheduled to speak later today. Isabel Schnabel, Governing Council member of the ECB said that monetary policy can and should respond to a disorderly repricing of risk premia. “We will react to new emergencies with existing potentially new tools”, said the spokeswoman highlighting that policymakers and closely monitoring the current situation.


The Pound Sterling continues to extend severe losses, closing 1.13% lower against the dollar a breaking yeat to date lows, and reaching prices we last witnessed in Q1-2020 during the first outburst of Covid. The Pound sank to its lowest level as traders eyed a widening gulf between the Bank of England and the Federal Reserve rate-hiking cycle. Concerns are growing that the BoE may have to take a more cautious approach to raise rates after data Monday showed a surprise contraction in the economy in April. Sterling also faces political risks such as uncertainty over the face of the agreement with the European Union over Northern Ireland and pressures arising from the conflict in Ukraine. 


The Japanese Yen sustains pressure against the greenback, retracing back to levels last seen in Q4-1998 by inflation figures in the U.S. which are set to oblige Fed policymakers to aggressively hike rates in its upcoming interest rate decision later today. The Yen fails to gain momentum as fundamentals in Japan remain compromised and BoJ monetary policy completely diverges from the tightening cycle of the Federal Reserve. Governor Kudora faces one of the stiffest challenges of his career this week as he looks to maintain stimulus without pushing the yen further below its 24-year lows. Economic believes that the dovish Kurdora approach may bring embedded risks of ratcheting up the staring on his control of yields and exacerbating public angst over rising prices. 


The Loonie extended losses against its US counterparty for the 5th straight trading session on Tuesday, on the back of expectations that the Fed will rate hike by 75bps (larger-than-expected a few days ago) to curb the runaway inflation. Nonetheless, further CAD depreciation might be capped due to three main factors: (1) the 10-year Canadian bond yield is higher than the 10-year US bond; (2) the Canada´s Central Bank is also assessing to deliver another rate hike and; (3) the CAD is still receiving support from higher oil prices. The latter, the oil embargo on Russian crude and OPEC fighting to increase production, continue to provide support to WTI and Crude to trade around $120/barrel, which helps the CAD.


The Mexican peso slid 0.64% against the U.S. dollar for a 4th trading session in a row. The MXN´s drop is in tandem with a rise in the US yields and a stronger dollar. However, the peso is still receiving some support from expectations of a higher policy rate in the country. Mexico´s swap rates extended gains yesterday, with the swap curve pricing in more than 300 basis points of rate hikes for this year, with the benchmark rate seen ending the year above 10%. However, Mexico´s president Lopez Obrador has already mentioned that raising interest rates too much can paralyze economic activity and growth. In addition, the president suggested that the best way to curb inflation is to consume local products.


The CNY continued to climb (+0.29%) against the greenback after the PBoC opted out of a rate cut right before industrial and retail sales data from May showed a mixed recovery. While the Fed is likely to deliver another rate hike today, the PBoC is discussing that its easing cycle is not over, with the market forecasting 30 basis points of cuts. This decision is supported by upbeat macro data – industrial output in May rose 0.7% from a year ago, reversing a slide of 2.9% in April and coming above market forecast. Furthermore, though retail sales dropped 6.7% last month, it was less than the 7.1% projected to fall and better than April´s 11.1% plunge. Looking ahead, similar to other currencies, all attention will be turned to the Federal Reserve´s rate decision later today.


Today, market players will be closely watching the decision rate, which might be the end of the tightening cycle in the country.  Brazil´s Central Bank may raise the Selic benchmark interest rate to 13.25% from 12.75%, according to market expectations. Meanwhile, adding further pressure on the BRL, Brazil’s lower house approved the main text of a bill that would place a cap on the ICMS tax on fuel, electricity, public transport, and telecommunications at 17%-18%. On this note, market participants are assessing the effects of this bill on education and health budgets, as it will bring a revenue loss up to BRL 83bi for the government balance. Investors and traders are also awaiting the FOMC rate decision today – higher US deposit rates might add additional pressure on the Brazilian Real.


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