Daily Market Pulse

Forgiving CPIs enable policymakers to delay tapering

7 minute read


The U.S. dollar index, a common tool used to value the greenback and assess its performance against a basket of six major currencies, fell over 0.3% and had a bounceback amid critical U.S. inflation figures and risk-off inflows closing relatively unchanged by Tuesday’s close. The initial drop from the greenback came off the back of weaker than expected inflation figures in the U.S., which came as a relief for investors in hopes that the Federal Reserve would delay tapering its bond purchase programme. The U.S. Core Consumer Price index missed expectations, posting 4% vs 4.2% previously anticipated, while headline inflation reported a 5.3% bond on expectations. The inflation results convinced some that the higher inflation is a result of rapid reopening, bottleneck effects, and this transitory, others see it as stagflationary, the cooldown of the economy. The weaker inflationary results induced optimism in global markets, igniting a sell-off on the dollar, although concerns about stock overvaluations, Covid, and uncertainty sent the safe-haven dollar back up, recovering losses despite U.S. treasuries yields edging lower. Policymakers in the U.S. and E.U. keeping re-thinking tapering chatters, while Covid woes and geopolitical tensions keep the market sentiment in check. Coming up, several economic activity indicators with small market impact are due through the course of the day which will start shaping the direction of the greenback amid the release of the highly anticipated U.S. inflation reports. Today, the greenback opened on the backfoot amid broader optimism surrounding tapering expectations, suggesting that stimulus will be sustained for the time being.   


The EUR failed to capitalize against the greenback during yesterday’s trading session amid risk-off flowers surrounding stocks overvaluations and Covid woes. However, inflation results in the U.S. suggested that U.S. policymakers will sustain current levels of stimulus as inflation seems to have slowed down during its previous releases. The latter, in combination with the European Central Bank, which has already started to slow down the pace of purchases, keeps the EUR on the front foot during the early hours of today's trading session, while the EUR continues to hold its monthly lows. Moreover, ECB policymakers Francois Villeroy de Galhau and Executive Board Member Isabel Schnabel both rejected fears of reflation, enabling the ECB committee to consider further tapering and potential rate adjustments.   


The British Pound rallied 0.54% after the U.S. inflation reports triggered a sell-off on the greenback, although the Sterling failed to sustain gains as Covid woes and geopolitical tension continue to weigh on the sentiment. However, U.K. inflation reports lift up optimism amid upbeat results during the early hours of today’s session. Core consumer Price index posted 3.1% vs 2.9% previously anticipated, while headline inflation showed 3.1% vs 2.9% expected. Moreover, the Retail Price Index increased 4.8% since last year while Producer Price Index readings also posted hot results. The positive market data underpinned the Pound as it attempted a bounceback to consolidate gains against the dollar. Additionally, Brexit jitters continue, as Britain delays full post-Brexit border checks from the European Union, blaming Covid disruptions and pressure on global supply chains. Fears of the EU-UK tussles also escalated after Andrew Bayley, governor of the Bank of England, strongly criticized the EU.’s post-Brexit plans on clearinghouses, warning any disarray risked a real threat to financial stability.     


The Japanese Yen sustained pressure over the greenback, amid cautiousness in the market optimistic vibe which has underpinned the Japanese currencies. It is looking to consolidate the breakthrough from its 1-month ranging channel. Additionally, the Yen is looking to capitalize over U.S. Treasury yields edging higher amid fixed income demand, which has dragged by a fall of 3.46% against the U.S. 10 year benchmark rate. Nevertheless, inflation figures in the U.S. prompted a dollar sell-off, as investors expect policymakers to delay tapering stimulus, which induces positive sentiment over the market in the form of a weaker dollar.  


The Canadian dollar remains steady ahead of key inflation reports from the Bank of Canada and Statistics Canada due later today. Market participants sustained its cautious mood, despite U.S. inflation figures posting soft results which suggest that the Federal Reserve will delay tapering its bond purchase programme, and that Jerome Powell’s transitory inflation stance remains a likely hypothesis. Moreover, risk-averse market conditions made it difficult for crude oil prices to extend gains, although the West Texas Intermediate (WTI) sustain levels above the USD 70 per barrel mark which could translate into a higher loonie depending on key inflation reports later today. 


The Mexican Peso sustains pressure over the dollar, testing key resistance at the 1 month high. However as the Mexican Peso maintains a positive outlook in the medium term, short-term weakness and corrections cannot be ruled out on rising odds of an equity market pullback globally. Moreover, Mexican data showed that the country ranked 37th out of 43 countries in its international competitiveness index report. The report highlighted health, clean energy, and connectivity as specific areas in which the gap between Mexico and other countries is particularly stark. Authorities also stressed the need to boost productivity and generate “well-being”, saying that this could only be achieved if the country is perceived as consistently attractive to talent and investment. 


The Chinese Yuan continues to extend gains against the dollar, recording 0.15% gains during yesterday's trading session and extending its capitalization against the dollar 0.16%, amidst greenback weakness and Southbound link between China and Hong Kong. Softer than expected U.S. inflation figures, which seems to provide Fed policymakers with space to delay tapering its bond purchase programme, has kept Treasury yields on the back foot, while fears of equity markets being overvalued keep risk-takers cautious. Moreover, the Peoples Bank of China announced the Southbound bond link between China and Hong Kong, which is set to start with a daily quota of CNY 20 billion. Reports showed that 41 primary open market operations dealers get permission to participate in the Southbound connect, which keeps investors optimistic about the outreach of Chinese investors to overseas markets. 


The Brazilian Real retraced slightly, recording 0.21% losses against the dollar amid market uncertainty. Inflation reading in the U.S. keeps the dollar subdued, as softer than expected results suggest that policymakers will delay tapering its stimulus programme. On the other hand, higher than expected inflation figures in Brazil keep policymakers under pressure, as inflation reached a 20 year high. The President of Brazil’s Central Bank, Roberto Campos Neto, said that the institution board won’t alter monetary policy plans after each inflation release, tempering investors bets of a steeper interest hike next week. Swap rates plunged following Campos Neto’s remarks as investors interpreted these comments as signs that the central bank will not accelerate the pace of borrowing costs increase as most economists would have anticipated.   


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