Daily Market Pulse

Dollar hovers near a week high


Following a 0.83% spike yesterday, the U.S. dollar remained relatively quiet early Tuesday amid market uncertainty. Still, it remains near a week high as markets await the next significant catalyst. Meanwhile, weak economic data in major economies fueled new fears of a global recession, driving safe-haven demand for the dollar. The dollar also benefited from expectations that the Federal Reserve will continue to tighten monetary policy despite signs of easing inflation and its impact on growth in the United States. The European trading session remained cautious, with stock indexes futures down between 0.06% and 0.16%. In addition, traders are now anticipating the latest FOMC minutes on Wednesday, which could provide useful information on the Fed's rate hike path.


Concerns about a Eurozone economic slowdown, combined with some Fed officials' hawkish remarks, have recently kept the Euro under pressure. The common currency plunged 0.94% yesterday before continuing its downward trend this morning. Since early July, there have been increasing signs of the Eurozone economy entering a recession, dampening the market mood. At the same time, inflation continues to break record highs, the energy crisis is far from over, and the European Central Bank is set to raise borrowing costs again in September. Experts suggest that Germany cut its gas consumption by one-fifth to avoid a crippling winter shortage. However, the country is nearing the third stage of an emergency plan, which includes gas rationing for industries and manufacturers.


The British pound dropped 0.66% on Monday and continues to edge lower this morning, moving closer to a two-year low. The concerns about the UK's economic outlook grew with the Bank of England expecting inflation to peak at 13.3% in October and the country to enter a five-quarter recession in Q4. The most recent data showed that the labor market is cooling, with job vacancies falling for the first time since August 2020 and the unemployment rate rising to 3.8%, as expected. Investors are now waiting for inflation and retail sales figures later this week. Money markets are currently pricing in an 83% chance of a half-point rate hike at the central bank's September meeting and nearly 125 basis points of tightening by the end of the year.


The Japanese Yen closed 0.12% higher against the U.S. dollar yesterday and lost its steam in the early hours of today. Weak economic data from China and the U.S. reignited fears of a global recession, keeping sentiment cautious. The August U.S. NY Empire State Manufacturing Index fell to -31.3 from 11.1 in July and 8.5 market forecasts. China's retail sales fell 2.7% year on year in July, compared to the 5.0% expected, while industrial production (IP) fell to 3.8% in July, compared to the 4.6% market forecast. Moving on, risk catalysts, second-tier U.S. activity, and housing data released today would provide fresh insights to the intraday traders. 


Falling crude oil price weighed heavily on the Loonie on Monday, causing it to close 0.95% lower against the U.S. dollar. The barrel of West Texas Intermediate fell more than 4% on Monday, pressured by a worsening demand outlook and the prospect of Iranian oil entering the market, before recovering to $88.50 on Tuesday. In other news, manufacturing sales in Canada fell 0.8% month over month in June 2022, falling slightly short of preliminary estimates of a 1% drop and following a downwardly revised 1.1% drop the previous month. It marked the second monthly decline in manufacturing sales since September 2021. Statistics Canada will release the July Consumer Price Index data later in the session.


The Mexican Peso advanced (0.09%) on Monday, making it the fifth consecutive session recording gains. However, it retraced this morning as markets became risk averse amid recession fears weighing over risky assets. Economic data from China and the United States disappointed, materializing concerns of a global slowdown. For the first time in three weeks, investors increased their bearish MXN bets to 27,621 contracts in the week ending August 9 compared to 23,053 the previous week. Mexico's TIIE swap rates fell across the curve on Monday, in line with lower U.S. Treasury yields, despite the Peso's weakness.


The Chinese Yuan remained under pressure after closing 0.35% lower yesterday against the greenback, as weak global economic data fueled recession fears. On Monday, data showed that confidence among U.S. single-family homebuilders and factory activity in New York state fell in August to their lowest levels since the beginning of the Covid-19 pandemic. That followed surprisingly weak Chinese activity data spanning industrial output, retail sales, and fixed-asset investment. Elsewhere, the People's Bank of China surprised markets recently by lowering key lending rates to boost demand and counteract economic weakness.


The Brazilian Real fell 0.41% against the U.S. dollar on Monday. The week began with renewed concerns about the global economy's health due to weak Chinese activity data, prompting investors to redirect funds to assets deemed safe. Domestically, economic activity recovered faster than expected in June, contributing to a second-quarter rally aided by a service sector recovery from the Covid pandemic. As a result, the financial market began to forecast a 2% increase in GDP in 2022, up from 1.98% previously predicted. As a result, the forecast for 2023 has increased from 0.40% to 0.41%.


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