The U.S. Dollar continued to advance following the latest comments and forecast adjustments from the Federal Open Market Committee (FOMC). The U.S. Dollar Index, a coefficient used to benchmark the performance of the dollar against its major peers, recorded 0.55% gains, consolidating levels we haven’t seen since mid-April. The change in narrative from the Fed underpin the demand for dollars, pricing in two interest rate hikes by the end of 2023 ahead of any other major central bank. Despite the lack of comments around tapering, market participants suspect that the FOMC plans its tapering approach in the background. Today we expect a quiet trading session without any foreseeable tier-one events that could change the current market conditions.
The common currency retraced 0.74% against the greenback following the FOMC event from Wednesday which continued to bolster the demand for dollars. Data from the Eurozone came in line with expectations with constructive Consumer Price Index readings at 2% and monthly core inflation marginally higher than anticipated at 1% vs 0.9% expected. Philip Lane, Executive Board member of the European Central bank (ECB) signaled yesterday that it may be too soon for the ECB to tighten monetary policy in September arguing that the central bank won’t have every piece of hard data at the required levels by then. Today we don’t anticipate any major data releases, therefore a calm session to close out the week is expected.
Cable fell 0.44% as the FOMC revised its economic projection on Wednesday and hinted at tapering in the months to come. Today, the Sterling has been under pressure since the early hours of the day as Retail Sales missed expectations with a reading at 24.6% year over year vs 29% previously anticipated, extending losses during the Asian trading hours. Investors started getting ready for next week's Bank of England (BoE) meeting in which market participants expect policymakers to leave stimulus and interest rates unchanged amid the recent lockdown extension and damper relations with the EU.
The Japanese Yen was the great surprise during yesterday’s trading session, recording 0.36% gains against the bolstered greenback, as the U.S. treasury yields retraced eight basis points after the FOMC event. However, fundamentals continue to support the dollar as low vaccination rates compromise the Japanese recovery and market participants expect the USD to recover those losses after the dust settles. The Bank of Japan (BoJ), announced that they will extend its corporate funding until March 2020 and maintain its unchanged monetary policy stance to continue to support the weakened economy. Additionally, the BoJ introduced its new program to support Financial institution investments and loans aimed at addressing climate change. The latest inflation figures released yesterday showed that the National Consumer Price Index contracted 0.1%, better than the previously anticipated 0.7% year-over-year decrease showing signs of recovery in domestic demand.
The Canadian dollar fell 0.62% against the American dollar amid lower crude oil prices and the greenback momentum underpinned by hawkish comments from Fed officials. The FOMC comments, hinting at tapering in the months to come, have weighed on equity indexes and riskier assets as the risk sentiment adjusts to lower amounts of stimulus to sponsor further appreciation adding to safe-haven currencies. The move against the greenback is underpinned by dovish comments earlier this week from Tim Macklem, governor of the Bank of Canada who said that any further monetary policy adjustment would be based on hard data in line with the pace of gradual recovery.
The Mexican Peso dropped 0.1% against the greenback, recording volatile swings during the trading session, reaching prices 1.08% lower and erasing losses soon after. The Mexican pesos opened the session under pressure following the general demand for dollars due to hawkish comments from FOMC which faded after the Mexican government announced its Agreement for Reciprocal Protection and Promotion of Investments (APRI) with Hong Kong. The Agreement intends to deepen economic relations between both countries committing to Foreign trade and investment in order to stimulate recovery from the pandemic.
The Chinese Yuan fell 0.79% against the American dollar following the revised forecast from the FOMC on the U.S. economy. The Chinese House prices index increased 0.1% during May, releasing figures at 4.9%. Policymakers are monitoring a general slowdown in the Chinese economy following the extended increase in commodities prices and global logistical bottlenecks, which continue to weigh on supply chains. Additionally, the People’s Bank of China (PBoC) launched its pilot program to start paying salaries in Digital Yuan to workers in the district of Xiong’an, being the first country to implement “on-chain” payments.
The Brazilian Central Bank (BCB) announced an interest rate hike of 75 basis points, setting the Selic rate at 4.25% amid inflationary pressures and attempts to avoid overheating the economy. The BCB indicated that it expects to carry out another 75-point hike in the upcoming meeting in August, arguing that policymakers are pursuing the normalisation of interest rates and flagged that the monetary policy committee is ready to reduce stimulus quicker if required. The Brazilian Real advanced 0.99% against the greenback following the hawkish stance of the central bank which has broadened the interest rate differentials against the dollar.