Daily Market Pulse

Inflationary pressures to set a choppy day on FOMC


The U.S. Dollar remains relatively stable at monthly highs against most of its major peers amid investor caution ahead of the Federal Open Market Committee (FOMC). The U.S. Retail Sales for May failed to impress the market releasing -1.3% monthly contraction vs -0.8% expected. On the other hand, the Producer Price Index (PPI) beat expectations posting 6.6% year over year vs. 6.3%. The strong PPI reading adds to the U.S. inflationary pressures which have been talked down by Fed officials who have stuck to the script that these are transitory and likely to fade away after the summer. The market focus turns to the FOMC where the Fed will announce its decision on monetary policy and provide economic projections which may hint at tapering.


The EUR had a shy session against the greenback (0.07%) as investors await catalysts from U.S. policymakers. The market remained stable after Eurostat posted Trade Balance figures for the European Union with a wider EUR 9.4 billion surplus. Moreover, Fabio Panetta, Executive board member of the European Central Bank, said yesterday that a Digital Euro would be a complement to cash, not a replacement committing to ensure a robust supply of cash and safeguard physical money, making sure it is accepted at merchants and working to reduce its environmental footprint. Today we expect a low flow of data that will unlikely affect the price of the euro, while most attention will be surrounding the Fed and its monetary policy statement. 


The British pound fell 0.18% against the dollar despite solid unemployment readings, as Brexit jitters and lockdown extension undermined the demand for sterling. The Office of National Statistics released the ILO unemployment rate at 4.7% meeting market expectations and improving 0.1% from the previous release. Additionally, Andrew Bailey, Governor of the Bank of England (BoE) said that cryptocurrencies won’t have a “free pass” in terms of regulation, as policy makers can’t ignore the public interest in name of innovation, vowing for “tough love” and a potential digital currency backed by the central bank. Moreover, inflation reports in the U.K have shown solid pick-up on Consumer Price Index (CPI) and Producer Price Index (PPI) beating the market's expectations, however, PPI core output remained lagged. We expect the markets to digest the inflation figures while they wait for FOMC release.  


The Japanese Yen remained unchanged during yesterday's trading session as market uncertainty increased closer to the FOMC. The Japanese economy continues to suffer from a diminished outlook as it remains behind other developed nations on containing the virus. Moreover, Japanese Banks have been vocal opponents of the Bank of Japan negative rate policy which has narrowed their margins and affected their market share. Policymakers have put into place different schemes to support lenders to dilute the effect of negative interest rates, but rumours surrounding deepening rates even further into negative territory have raised significant concerns among the banking community. 


The Loonie fell 0.4% against the dollar consolidating beyond the four week upper boundary on the USDCAD pair. The U.S. inflation figures released yesterday seem to have ignited the rally of the dollar, while Canadian Housing starts missed expectations releasing 275.9k vs 280k expected. On the other hand, crude oil prices continued to climb higher and the commodities driven CAD have failed to find demand off the back of booming oil crude prices. Later today, we expect the Bank of Canada Consumer Price Index following a speech from Governor Macklem. 


The Mexican peso fell for the third consecutive session against the greenback recording 1.2% retracement at the bottom of the day and closing 0.3% lower. The international credit rating agency Moody’s assessed the recent new appointments from President Andres Manual Lopez Obrador and the results from the midterm elections. The credit agency believes that even if the opposition has a stronger presence in the chamber of deputies, the Morena party should be able to deliver on policy objectives. On the other hand, S&P, another rating agency, left Mexico’s debt rating unchanged at BBB+, adjusted its perspective to negative due to a weakened fiscal condition. 


The Chinese Yuan remained virtually unchanged as market participants remain cautious ahead of the FOMC meeting and data releases from China. Frictions between G7 leaders and China have raised concerns among market participants as an escalation of these circumstances could shift the risk-on sentiment we have witnessed during the past months. On the other hand, the People's Bank of China (PBoC) plans to expand trials for the Digital Yuan as market participants expect it would come in circulation by 2022. 


The Brazilian Real continued to advance against the greenback registering 0.4% gains edging close to the year highs. The overall performance of the Brazilian economy continues to be positive with strong fundamental indicators reflecting the pick up in growth. Brazil’s Central Bank (BCB) released its latest monthly indicator of economic activity (IBC-BR) which showed an increase of 0.44% in economic activity for April. The positive increase from the indicator in April came after a contraction of 1.59% on the previous release of March netting an aggregated increase of 4.77% year to April.  


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