Daily Market Pulse

Inflation and unemployment continues to be center stage

5 minute read


The negative USD trend continued, retracing 0.5% during yesterday's trading session, pushing the USD Index, which benchmarks the greenback against a basket of other major currencies to the lowest since February this year. Despite the selloff in USD, the market has taken a risk-off stance ahead of the FOMC minutes which will be released later today. Inflation and Unemployment continue to be the main concern for market participants. Non-Farm Payrolls in April were significantly below expectations and inflation has tripled its pace since January. We expect some volatility following Powell's comments during today's press release which will also provide some color on the expectation of interest rates and monetary policy.  


The EUR closed another session in positive territory (+0.61%) against the USD, reaching its highest level in over two months. GDP figures for Q1 remained unchanged and the successful rollout of vaccination programs as well as a reduction in the number of infections has provided confidence in the Euro. However, Christine Lagarde emphasized that despite the solid performance of the bloc, there are still high levels of uncertainty surrounding the path of the pandemic and the ECB has committed to shield the eurozone economy and to not withdraw support too soon. Eurozone CPI figures released earlier today underperformed inflation expectations for the month of April, while March figures were revised from 1% to 0.6%.


Sterling had a positive session (+0.35%) against the USD on Tuesday closing at a key resistance level. The rally was fuelled by UK inflation data which doubled in the month of April, led by price fluctuations in clothing and energy costs, while job data released solid expectations of 4.8%. The Bank of England (BoE) is expecting inflation to break its target level of 2%, reaching 2.5% by the end of 2021. However, the bank expects inflation to converge back to 2% throughout 2022 and 2023. BoE Governor Bailey said the bank will track this very closely and will act accordingly to the requirements of the economy. Impact on the pound will be assessed after the retail sales and PMI release on Friday.


Yesterday, the Japanese Yen had a shy session, although it edged 0.3% up against the greenback, which was mainly driven by uncertainty over global inflationary expectations and poor macroeconomic data in Japan and the US. Asian equity markets were impacted after poor GDP figures were released. The bearish trend followed a risk-off sentiment ahead of FOMC minutes which would set expectations from the monetary policy approach to the latest jump in inflation.   


The Canadian Dollar continued its bullish run, backed by the latest rise in commodity prices and inflation. Well known for its positive correlation with oil and commodities, the Loonie has established itself as the best-performing currency against the USD, and has reached a key psychological level that if broken, we can expect the bull run to continue at a similar pace, should commodity prices continue pushing higher. Today’s CPI figures will be key for the BoC to define whether its hawkish comments will continue to fill the positive run the Loonie had during 2021. 


The Mexican peso continued to pile on the pressure against the USD, fuelled by an increase in commodity and oil prices. The latest mexican macroeconomic releases suggest that Banxico might shift its expansionary policy, aiming to control inflationary pressures. However, the performance of commodity prices has had a positive impact on the internal demand in the economy which is showing healthy signs of economic activity and government performance. 


The Chinese Yuan kept its bullish trend following a general USD depreciation, with a strong retracement during the early hours of today's session. Ahead of the interest rate decision of the People’s Bank of China (PBoC), market expectation has set that the institution would hold Loan Prime Rates (LPR) unchanged, adding up to 13 months of these levels. However, concerns over the economic slowdown of China has raised significant risk for investors as the pair also trades at the lowest level seen during 2021, but the PBoC have said in their report that China had no basis for long-term inflation or deflation, hinting at stable monetary policy.


The Brazilian Real printed gains (+0.23%) against a weaker U.S. dollar on Tuesday, after the government raised its inflation and economic growth outlook for 2021. International tailwinds also helped the BRL, with the greenback dropping on the back of dovish signals from the Fed, which buoyed risk assets, including emerging market currencies. Looking ahead, once more, the Senate’s Parliamentary Inquiry Committee to investigate the Covid-19 response in Brazil (Covid CPI) will be center stage. Today the Senate will hear the testimony of Eduardo Pazuello, former Health Minister). This testimony is set to fuel volatility in the currency as the government will likely suffer a public embarrassment from Eduardo Pazuello’s testimony.


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