Daily Market Pulse

Dollar holds decline after Fed’s decision


Despite the U.S. Federal Reserve's aggressive policy outlook, risk flows dominated financial markets in the second part of the day on Wednesday. The U.S. Dollar Index, which lost 0.27% on Wednesday, remains reasonably calm early Thursday as investors await the EU inflation report, the Bank of England's (BOE) rate decision, and U.S. mid-tier data releases. Meanwhile, market sentiment remains unsettled amid conflicting stories on the Russia-Ukraine crisis. In terms of monetary policy, the Fed raised its policy rate by 25 basis points following its two-day meeting, a widely anticipated decision. The Summary of Economic Projections, or dot-plot, disclosed that policymakers expected six more hikes this year, with the policy rate reaching 1.9% by the end of 2022 and rising to 2.8% by the end of 2023. In other news, futures on the S&P 500 and Nasdaq 100 fell after the S&P 500 posted its greatest two-day gain since 2020, bolstered by rumors of possible progress in Russia-Ukraine cease-fire talks.


The Euro closed 0.72% higher on Wednesday before slightly edging up on Thursday morning. As diplomatic efforts to resolve the violence in Ukraine continued and markets absorbed the new Fed action, the Euro recovered from over a two-year low. The Federal Reserve began its rate hike cycle in March with a 25 bps increase and plans to raise borrowing prices six more times this year. Meanwhile, the European Central Bank 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. Inflation in the EU is already at record levels and it is expected to become more persistent as a result of increasing commodity prices and a tight labor market. That being said, EU inflation stood at 5.9% year on year in February, compared to 5.8% expected. In other news, the Stoxx Europe 600 index erased an early gain as the bond market warned of a growing possibility that the Fed's efforts to control inflation could precipitate an economic slowdown.


The Pound Sterling closed 0.82% higher and continued to edge upwards this morning ahead of the Bank of England’s monetary policy decision. The British pound rose to the highest level in a week, as investors awaited a major Bank of England decision in which the central bank is largely expected to announce a quarter-point interest rate hike to curb soaring inflation. Borrowing costs would climb for the third time in a row, returning interest rates to pre-Covid levels. Inflationary pressures are mounting, with UK inflation at levels not seen since 1992 despite the fact that the effects of the Ukraine war on food and energy costs have not yet been factored into the current CPI figure. Markets predict that interest rates in the United Kingdom will reach 1% in May. Investors will also be watching the central bank's economic prognosis in the aftermath of Russia's invasion of Ukraine as well as any plans for balance-sheet reduction. in the run-up to the Bank of England's interest rate decision.


The Japanese Yen closed 0.36% lower in the previous session against the greenback. The Yen weakened slightly against the U.S. dollar on Thursday after falling for eight straight sessions to its lowest level since January 2016. This comes as central bank Governor Haruhiko Kuroda said Japan is unlikely to see inflation reach the 2% target despite rising energy costs, arguing for the continuation of ultra-easy monetary policies. His statements emphasized the growing gap between the Bank of Japan and the Federal Reserve, which hiked interest rates for the first time since 2018 on Wednesday and announced plans for further rate hikes. On Thursday, the Nikkei 225 Index rose 3.46% while the Topix index rose 2.47%. Both indexes reached their highest levels in more than two weeks as Japanese shares tracked a relief rally on Wall Street following the Federal Reserve's widely anticipated 25 basis point rate hike.


The Loonie closed 0.70% higher in the previous session before extending its gains this morning. This follows a drop in the value of the U.S. dollar as investors continue to assess the discussions between Moscow and Kyiv. Also, hotter than expected Inflation data, as well as an increase in oil prices, bolstered the Loonie. That being said, Canada's annual inflation rate accelerated to 5.7% in February 2022, the highest since August 1991 and slightly higher than market expectations of 5.5%. This arrives as geopolitical risks and tight OPEC+ supplies fueled a rally in oil prices to more than 13-year highs and logistical issues continued to underpin raw material and transportation costs. Meanwhile, Brent crude jumped 4.5% on the day to $102.47 per barrel. On Wednesday, the S&P/TSX Composite index closed 1.3% higher, tracking U.S. markets as traders absorbed domestic price data and the U.S. Fed's rate move.


The Mexican Peso closed 0.90% higher yesterday and continued to extend its gains modestly on Thursday morning. This comes as the U.S. dollar has weakened despite ongoing peace discussions between Russian and Ukrainian officials. The Mexican Peso is also being supported by the prospect of a rate hike, which has been heightened by the revelation of the most recent inflation figures. Having said that, consumer prices in the country increased 7.28% year on year in February. Elsewhere, Mexico's new central bank president, Victoria Rodriguez, who rose from obscurity to become the most powerful woman in Latin American finance, has been tasked with managing the country's worst inflation problem in two decades.


The Chinese Yuan closed 0.28% higher in the previous session against the greenback. On Thursday, the Yuan maintained its recent gains against the U.S. dollar, moving farther away from a 4-month low touched earlier this week 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. Meanwhile, the People's Bank of China added a net 100 billion yuan in 1-year MLF (Medium-term Lending Facility) 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 attempt to cushion an economic slowdown, with analysts predicting further monetary easing given Beijing's recent vow to calm financial markets.


The Brazilian Real spiked 1.17% on Tuesday against the greenback. After markets digested rate hikes from both the Central Bank of Brazil and the U.S. Federal Reserve, the Brazilian real rose from a two-week low against the U.S. dollar. The Central Bank of Brazil unanimously voted to boost the Selic rate by 100 basis points to 11.75% on March 16th as predicted, while predicting another rate hike of 100bps at its next meeting. It was the ninth straight increase in interest rates since the Fed began tightening. Meanwhile, developments in Russia-Ukraine discussions have reduced demand for safe-haven currencies, as investors continue to follow commodity prices and trade terms with Brazilian agricultural items and metals to evaluate the demand for the Real.


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