Daily Market Pulse

Dollar bounces off recent two-month lows


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.11% higher followed by it extending its gains modestly on Tuesday. In doing so, the U.S. dollar reflects a recovery from recent lows as the Federal Reserve's hawkish rate stance remained intact ahead of its meeting in the last week of January. The U.S. dollar's sustained momentum strength is derived from rising Treasury rates. The yield on the benchmark U.S. 10-year Treasury note jumped to 1.85% on Tuesday, the highest level since January 2020, amid growing fears that the Federal Reserve would need to tighten monetary policy in order to combat rising inflation. Additionally, the yield on the two-year note surpassed 1% for the first time since 2020. The rise in both two-year and ten-year Treasury yields underpin an interest rate hike from U.S. policymakers in March, and many investors are betting on three or more rate hikes this year. Moving forward, data on the New York Empire State Manufacturing Index, expected at 25.7, will be revealed today, which will further influence U.S. dollar prices.


The Euro closed 0.02% lower before falling sharply on Tuesday’s early morning session. The common currency consolidates losses while the greenback continues its persistent recovery from two-month lows. Meanwhile, for the time being, the policy divergence between the Federal Reserve and European Central Bank (ECB), as well as the performance of treasury yields, are projected to continue driving the pressure around the Euro. Recently, ECB officials have been rather outspoken about the possibility that high inflation would last longer in the Euro area, reigniting speculation of a rate hike by the central bank by the end of 2022. Having said that, the relentless spread of the coronavirus pandemic remains the only element to consider when assessing the region's economic development prospects and investor morale. Looking forward, the ZEW survey will be featured today, showing economic sentiments in Germany as well as the wider Euroland. Additionally, market participants do not anticipate any influence on the FX market from the EcoFin conference today, which is expected to focus on the European recovery fund 


The Sterling closed 0.23% lower on Monday before reversing the intraday downtrend dip on early Tuesday, following the release of unemployment data. Political uncertainty in the UK and a sour market sentiment might keep the currency on the defensive. Meanwhile, the Office of National Statistics (ONS) reported that the Unemployment Rate fell to 4.1% from 4.2%, as predicted. However, the anticipated rebound failed to materialize in light of recent political developments in the United Kingdom. The U.K. Prime Minister Boris Johnson's resignation is gaining momentum among the Conservative party after news of his lockdown party resurfaced. Moving on, traders are now awaiting the publication of the U.S. economic calendar, while political news surrounding the Prime Minister will continue to influence Sterling prices. Market participants expect that broader political uncertainty in the United Kingdom will continue to add pressure over cable, despite encouraging macroeconomic data.


The Japanese Yen closed 0.46% lower yesterday, followed by it extending its downtrend and edging lower during Tuesday morning’s session after the release of the Bank of Japan’s (BoJ) monetary statement. The Japanese Yen eased against the U.S. dollar on Tuesday as the BoJ kept its benchmark short-term interest rate steady at -0.1% and its 10-year bond yields at 0%, as expected. Additionally, the BoJ boosted its inflation prediction for 2022 to 1.1% from 0.9% before. Furthermore, the board increased the predicted growth rate for FY 2022 to 3.8% from 2.9% before, reflecting the government's huge stimulus. The BoJ emphasized that it would retain its ultra-loose monetary policy even as global rivals aim to leave crisis-mode measures, while also signaling an increasing likelihood that recent commodity-driven price increases may broaden. Elsewhere, industrial production in Japan jumped 7.0% month-on-month in November 2021, marking a second straight month of increase in industrial output and record growth. Moving forward, traders will reference broader market sentiments to influence Yen prices further. 


The Loonie closed 0.20% higher and extended its upwards momentum on Tuesday’s morning session. The Loonie edged higher for the second consecutive day, supported by rising crude oil prices, which typically support the commodity-linked Loonie. Indeed, the black gold has risen to a more than seven-year high as geopolitical tensions in the Middle East have increased. On the other hand, the broad-based U.S. dollar gained, aided by rising U.S. Treasury bond rates, keeping the upside contained. Meanwhile, investors are awaiting tomorrow's inflation data for more signals on the monetary policy's future moves. Increased inflation numbers could bolster the Bank of Canada's case for raising interest rates. Moving on, crude oil prices and wider market sentiments will continue to influence Loonie’s prices. 


The Mexican Peso finished flat on Monday before dropping against the greenback during Tuesday’s morning session. This is due to the U.S. dollar's strength against its peers, which is being fueled by the Fed's hawkish tone and increasing Treasury rates. Additionally, the high-frequency dashboard shows that activity in Mexico is waning and is way below pre-pandemic levels in several industries. Although the rising number of illnesses associated with the spread of Omicron increases hazards, the limited data available through the second week of January indicate that it has not yet had a substantial impact on activities. The administration is averse to imposing more lockdown limitations. Elsewhere, stock prices were up 19% from their pre-pandemic level during the second week of January, almost steady from a week earlier and up from December.


The Chinese Yuan closed 0.16% higher on Monday. The Yuan held strong against the U.S. dollar on Tuesday, despite the Chinese central bank cutting one of the country's major policy rates in response to sluggish economic growth. The People's Bank of China cut interest rates on one-year MLF (Medium-term Lending Facility)  loans by ten basis points to 2.85% on Monday, citing a slowdown in the country's fourth-quarter GDP growth in 2021. Contrary to other major countries, which are on course to normalize monetary policy this year, the move prompted Chinese President Xi Jinping to warn against a quick increase in global interest rates at Monday's Davos Agenda virtual event. Additionally, the Yuan benefitted from a record trade surplus as Chinese exports remained solid in December, as well as from restricted onshore dollar liquidity. 


The Brazilian Real closed 0.28% higher against the greenback on Monday. The Brazilian Real traded at its highest level since November 16th, after data showed that the Brazilian economic activity expanded by 0.7% in November, slightly above market forecasts and snapping a four-month streak of decline. The currency has been hammered by periodic lower adjustments to growth projections, and so better-than-expected economic data has sparked some market confidence. Additionally, the currency gains are being supported by stronger-than-expected inflation statistics, which bolsters the argument for higher interest rates in Brazil. Meanwhile, the Central Bank of Brazil's market expectations survey for 2022 revealed that growth predictions were increased marginally to 0.29% from 0.28%, while inflation forecasts were increased to 5.09% from 5.03%. Elsewhere, traders are also keeping an eye on the likelihood of an increase in government officials' demands for salary adjustments, considering the possible budgetary implications.


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