On Wednesday, the U.S. dollar index (DXY) perked up 0.13% to reach its highest daily close in three weeks. The dollar continued to nudge higher this morning amid a cautious market mood following the Fed's policy readings. Yesterday, Federal Reserve officials agreed that interest rates needed to be raised to keep inflation under control. Still, they expressed greater caution about the pace of future increases. The U.S. policymakers did not provide specific guidance for future rate increases, instead mentioned that rate decisions would be based on incoming economic data. As a result, markets see a 60% probability of a 50 bps rate hike by the Fed at the September meeting, while before the Fed minutes, a third 75 bps rate hike was likely.
The Euro appears to be edging lower after closing the previous day with a 0.09% gain. Earlier in the day, Isabel Schnabel, an executive board member of the European Central Bank (ECB), stated that a technical recession in the eurozone was possible, undermining the common currency. The latest data shows that the Eurozone economy grew 0.6% in Q2, falling short of preliminary estimates of 0.7%, althoughexceeding the 0.5% increase in Q1. Currently, investors are weighing the European Central Bank's policy tightening path against the region's economic outlook. The ECB is expected to raise rates in September to combat soaring inflation, although the region's outlook is bleak due to an energy crisis caused by reduced Russian gas supplies.
Following a 0.40% drop yesterday, the British Pound came under renewed bearish pressure in the early European session on Thursday. Market sentiment remained clouded mainly by concerns about the impact of additional interest rate hikes to tame runaway inflation on the growth momentum. Recent data shows that annual inflation in the UK rose to a 40-year high of 10.1% in July, exceeding analysts' expectations, intensifying the squeeze on households, and putting pressure on the Bank of England to continue its aggressive tightening.
After a plunge of 0.63% on Wednesday, the Japanese Yen fell further today as U.S. treasury yields rose. Market participants are evaluating the U.S. Federal Reserve's decision to implement additional rate hikes in the future to prevent inflation from becoming entrenched. Yesterday's retail data in the United States showed that activity remained flat in July. Still, traders were unconcerned and increased the likelihood of a 75 basis point rate. The hawkish tone was dampened after the minutes revealed that Fed policymakers might soon slow the pace of tightening. Traders will be looking for direction from a slew of economic data from the United States, including the Philadelphia Fed Manufacturing Index and the Conference Board's Leading Index.
The Canadian dollar fell 0.53% at the close before recouping its losses this morning. Recent data showed that new consumer price data backed investors' bets that the Bank of Canada should keep raising lending rates aggressively. While headline inflation fell for the first time in over a year, the central bank's core readings rose to 5.3% from 5.2% the previous month. The Bank of Canada surprised markets by raising interest rates by 100 basis points, the largest increase since 1998, and signaled further tightening to combat inflation well above its target.
The Mexican Peso traded lower on Thursday morning after it retreated 0.37% yesterday. Even though the Peso showed a decline in the last couple of sessions, experts say that sharp rises in domestic interest rates by Banxico have supported the currency in recent sessions. Policymakers are expected to tighten rates further, cushioning the currency's further downside. Furthermore, in the short term, Banxico's rate hikes would match the Federal Reserve's pace, keeping the interest rate spread between the two countries near 600 basis points. On the other hand, some risks loomed on the horizon, such as the USMCA arbitrage against Mexico by Canada and the U.S. due to energy policy, inflation risks, and continued weak foreign investment.
The Chinese Yuan fell against the U.S. dollar to its lowest level in three months as a shaky economic recovery puts pressure on China's central bank to take more easing measures when the U.S. Federal Reserve signaled its commitment to fighting inflation. China's latest data fell short of expectations and provided further evidence of an economic slowdown, prompting the People's Bank of China to unexpectedly lower key lending rates to boost demand. Elsewhere, Nomura and Goldman Sachs have cut their estimates for Chinese growth this year, citing weaker demand, Covid-related uncertainties, and power shortages.
Yesterday, the Brazilian Real closed 0.27% higher against the U.S. dollar. Markets are analyzing the minutes of the Federal Reserve meeting. However, the document did not show a clear trend among Fed members toward a smaller increase of 0.50 percentage points or a third consecutive increase of 0.75 percentage points at the September meeting. Meanwhile, domestically, attention is focused on the start of the election campaign and the first polls of voter intention. On the economic front, Fundação Getulio Vargas (FGV) data released on Wednesday showed that the General Price Index-10 (IGP-10) fell 0.69% this month, the first deflation since the end of last year, reflecting a drop in commodity prices and a reduction in ICMS on the electricity and fuel sectors.