Daily Market Pulse

Dollar consolidates ahead of FOMC meeting


The US dollar is struggling to find demand early Tuesday as markets examine the latest Russia-Ukraine headlines as well as the ramifications of Asia's soaring coronavirus cases. The U.S. dollar index fell 0.9% on Monday and remains consolidated this morning. On the geopolitical front, Ukrainian President Volodymyr Zelensky's adviser stated that they anticipate completing a peace accord with Russia within a couple of weeks, if not in May. In addition, on the monetary policy row, the Federal Reserve is due to begin a two-day policy meeting in which it is largely expected to raise interest rates by 25 basis points in order to curb surging inflation. Elsewhere, S&P 500 and Nasdaq 100 futures wavered before going lower, indicating that another tumultuous day is likely after the Nasdaq closed in a bear market on Monday. Brent crude dropped 5.4% to $101.17 a barrel.


The Euro closed 0.39% higher on Monday before extending its gains on Tuesday morning. The currency traded up from a two-year low as diplomatic efforts to end the conflict in Ukraine continued ahead of major central bank meetings later this week. To combat inflation, the U.S. Federal Reserve and the Bank of England are expected to raise interest rates by at least a quarter-point later this week. The European Central Bank (ECB) stated last week that it may halt asset purchases in the third quarter if rising inflation outweighs concerns about Russia's surprise invasion of Ukraine. On the domestic front, Europe is being hit by a Covid resurgence following a hasty exit. Cases are on the rise in Germany, the Netherlands, and Switzerland. Concerns about war and inflation have been exacerbated by pandemic strain. Elsewhere, European equities fell as a continuous selloff in Chinese stocks buffeted global markets.


The Pound Sterling closed 0.34% lower and continued to edge lower modestly this morning. This comes as the market remains cautious ahead of interest rate announcements by the Bank of England and the Federal Reserve of the United States later this week. Market mood is also pulled down by China's greatest virus wave since March 2020, which has weighed on crude oil and industrial metals. In terms of data, the UK unemployment rate fell to 3.9% in the three months leading up to January 2022, the lowest in two years and lower than market predictions of 4% as the labor market continued to rebound. On the monetary policy front, traders expect the Bank of England to raise interest rates by 25 basis points to 0.75% on Wednesday. In other news, the FTSE 100 fell on Tuesday, mirroring its European rivals, as lower commodity prices impacted on oil and mining sectors.


The Japanese Yen closed 0.78% lower in the previous session against the greenback. On Tuesday, the Yen weakened against the U.S. dollar as the Bank of Japan's dovish approach contrasted dramatically with other major central banks preparing to tighten monetary policy. The Japanese central bank, which is slated to convene on March 17-18, has indicated repeatedly that it will maintain ultra-loose monetary policies in order to assist the economic recovery and reach its 2% inflation target. In other news, the Nikkei 225 Index rose 0.15%, while the broader Topix Index rose 0.79% on Tuesday. This was led by gains in consumer and industrial stocks as the Japanese government considers lifting the Covid-19 quasi-state of emergency for 18 prefectures when it expires next week due to falling cases.


The Loonie closed 0.71% lower in the previous session before reviving its momentum slightly this morning. In the third week of March, the Canadian dollar traded up from a three-month low on March 8th, amid a higher risk appetite and expectations of tighter monetary policy. Hopes for a de-escalation of Russian strikes in Ukraine weighed on the U.S. dollar, as did the potential of cease-fire talks between both delegations. At the same time, robust February labor data in Canada bolstered the Bank of Canada's expectations of tighter policy. The central bank raised its overnight rate target by 25 basis points to 0.5%, the first increase since October 2018, and reiterated that it will use its monetary policy tools to bring inflation to the 2% target. In other news, Canada's S&P/TSX Composite Index fell 1.4% on Monday, extending the previous session's losses and pulled down by lower commodity prices, as investors watched security discussions between Ukrainian and Russian delegations, which are expected to resume tomorrow.


The Mexican Peso closed 0.04% higher yesterday before extending its gains modestly on Tuesday morning. This comes as the U.S. dollar continues to fall as investors examine the Ukraine-Russia conflict situation. Furthermore, the peso is strongly supported by higher-than-expected inflation numbers, which boost the likelihood of rate hikes by the Central Bank of Mexico. On the domestic front, Mexico's battered local bonds are beginning to lure bargain hunters, indicating that the Ukraine war did not prompt panic selling from foreign investors. Furthermore, foreign investors continued to pour money into Mexico in the week ending February 25, despite significant outflows in past moments of global risk aversion such as Brexit, Trump's election, and the pandemic.


The Chinese Yuan closed 0.29% lower in the previous session against the greenback. The Yuan fell against the US dollar on Tuesday, reaching its lowest level since November and retreating further from four-year highs as traders braced for the Federal Reserve's expected rate hike. The Yuan, like other Chinese assets, plummeted as markets were startled by new Covid lockdowns and threats of foreign sanctions owing to Russian ties. Meanwhile, the People's Bank of China injected a net 100 billion yuan in 1-year MLF loans on Tuesday but defied market expectations by maintaining the policy rate steady. The Chinese central bank has previously cut multiple policy loan rates in an effort to cushion an economic slowdown, with economists expecting further monetary easing in the coming months. Investors also considered China's unexpectedly strong industrial output and retail sales figures.


The Brazilian Real closed down sharply by 1.22% amid the start of the week with market players digesting the potential deterioration of the country's financial condition and Brazil’s Central Bank’s decision to raise the Selic rate once again. Financial conditions reflect the availability of financing in an economy and are perceived to be strongly correlated with future growth. Meanwhile, according to the Bloomberg Financial Condition Index, the condition of finances in Brazil has tightened significantly since Russia's invasion of Ukraine, driven largely by rising oil prices. On the economic dynamics, the Central Bank has important obstacles to overcome. The double-digit readjustment in the prices of gasoline, diesel, and cooking gas led the government to announce measures to mitigate these inflationary pressures, but at a significant fiscal cost. The combination of rising inflation and slower economic growth amid fiscal risk is the perfect recipe for a stagflation scenario. Therefore, traders expect BCB to circumvent this possible scenario in its tomorrow’s meeting 


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