Daily Market Pulse

Dollar silent ahead of FOMC decision

7 minute read


Early Wednesday, risk flows dominated financial markets as investors remained optimistic about a diplomatic solution to the Russia-Ukraine dispute. The U.S. dollar index closed 0.03% lower on Tuesday before maintaining its losses this morning ahead of the Federal Reserve's crucial monetary policy announcements. On the political front, talks between Russian and Ukrainian officials are due to resume on Wednesday. Moving forward, investors will be watching for the key Federal Reserve decision, in which the central bank is generally expected to declare a quarter-point interest rate hike to curb soaring inflation. Given the increased uncertainty from the Russia-Ukraine war, investors will also be looking for changes to the economic outlook, the path of interest rates, and the expected timeline of asset reduction. In other news, U.S. stock index futures are up between 0.3 and 0.8% in the early European session.


The Euro closed 0.15% higher on Tuesday before extending its gains on Wednesday morning. This comes on the heels of the weakened U.S. dollar, which has fallen marginally as a result of ongoing talks between Russian and Ukrainian officials. On the domestic front, Spain and Portugal launched new steps to protect their economy from rising power bills and urged for European-wide action, escalating a push across the continent to protect from the consequences of the Ukraine conflict. Also, According to the statistics. Industrial production in the Eurozone remained flat in January 2022, compared to estimates of a 0.1% increase, as a jump in omicron coronavirus cases weighed on the economy in the first quarter and supply bottlenecks persisted. Elsewhere, the Stoxx Europe 600 index rose more than 2%, with technology shares leading the way. 


The Pound Sterling closed 0.31% higher and continued to edge upwards ahead as the U.S. dollar remained silent ahead of Fed’s key monetary policy decision. The British Pound rose from a more than 16-month low earlier this week as the Bank of England is widely expected to raise interest rates by at least 25 basis points to 0.75% on Thursday, putting borrowing prices back to pre-pandemic levels. Money markets are pricing in a 70% possibility of a 50 basis point hike by the Bank of England in March and a 160 basis point boost by December 2022. The newest data from the Office of National Statistics (ONS) further support the rate hike case, showing that the unemployment rate decreased more than expected to 3.9% in the three months ending in January 2022, the lowest since the same time in 2020. while earnings growth also came in above market forecasts. In other news, the FTSE 100 rose to a two-week high on Wednesday, reflecting optimistic sentiment in Asia as Chinese officials soothed fears about foreign listing restrictions and committed to helping local financial markets.


The Japanese Yen closed 0.09% lower in the previous session against the greenback. On Wednesday, the Yen lingered near 5-year lows, as the Bank of Japan's consistent dovish stance contrasted sharply with other major central banks prepared 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 economic recovery and reach its 2% inflation target. In other news, the Nikkei 225 Index surged 1.64%, while the wider Topix Index advanced 1.46% on Wednesday as consumer and travel sectors rose on easing coronavirus bans, while technology companies followed Wall Street's overnight rally.


The Loonie closed 0.46% higher in the previous session before extending its momentum slightly this morning. This comes as the U.S. currency has depreciated as diplomatic talks over the Ukraine situation continue. Meanwhile, the falling crude oil prices limit Lononie's gains. On the statistical front, manufacturing sales in Canada increased 0.6% from the previous month to CAD 64.8 billion in January 2022, retreating from an upwardly revised 0.8% increase the previous month and falling short of an early expectation of a 1.3% increase. Manufacturing sales increased for the fourth month in a row, with higher sales recorded in 14 of 21 industries, led by the petroleum & coal, and wood product industries. In other news, Canada's S&P/TSX Composite index closed flat, after falling as much as 1% during the session as losses in the energy sector due to a prolonged drop in oil prices offset gains in tech sectors.


The Mexican Peso closed 0.42% higher yesterday and continued to extend its gains modestly on Wednesday morning. This comes as the U.S. dollar has taken a step back amid ongoing talks between Russian and Ukrainian officials to end the war. The Mexican Peso is also being supported by the potential of a rate hike, which has been heightened by the release of the latest inflation statistics. In turn, this shows that consumer prices in the country grew 7.28% year on year in February. Meanwhile, Grupo Financiero Inbursa SAB, Mexico's best-performing stock this year, is likely to rise much further as the bank prepares to spin off its private equity arm and may potentially make a bid for Citigroup Inc.'s local holdings.


The Chinese Yuan closed 0.08% higher in the previous session against the greenback. On Wednesday, the Yuan appreciated against the U.S. dollar, extending a rally from 4-month lows following news that Saudi Arabia is in active talks with Beijing to price part of its oil supplies to China in the currency. Analysts speculated that Saudi Arabia may be aiming to lessen its reliance on the dollar as a reserve currency, given that assets might be frozen or taken on a political basis as evidenced by recent sanctions against Russia for its invasion of Ukraine. The Yuan's recovery comes at a time when Chinese assets have been under pressure due to rising domestic and external pressures. In other news, the Shanghai Composite rose 3.48%, while the Shenzhen Component rose 4.02% on Wednesday as mainland shares reversed early losses in a volatile session after China's state council vowed to keep the stock market stable and encourage overseas listing.


The Brazilian Real plunged 1.23% on Tuesday against the greenback. The decline in the Brazilian Real coincided with a new day of losses on the Brazilian stock exchange, owing to a drop in commodities prices. The recent spike in prices of raw materials has created a safe haven for domestic assets amid the global instability caused by the Ukraine war and its economic ramifications. Meanwhile, investors are looking forward to the U.S. Federal Reserves and Bank of England's (BoE) monetary policy decisions this week. The Fed is likely to start a rate hike cycle with a 0.25% point increase. Going forward,  the Monetary Policy Committee (Copom) also informs the Selic of its decision on Wednesday. The Selic, which is presently yielding 10.75% per year, is forecast to climb by one percentage point. However, some markets are pricing in a more aggressive hike in the wake of inflationary risks posed by the Ukraine conflict. In addition, the expectation for GDP growth this year has risen from 0.42% to 0.49%. However, the market has reduced its high projection for 2023 from 1.50% to 1.43 %. 


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