Daily Market Pulse

Cautious optimism ahead of Fed monetary policy meeting


The U.S. dollar index, a common tool used by market participants to benchmark the performance of the greenback against a basket of six major currencies, struggled during Monday’s trading session amid a shift in risk sentiment ahead of key central bank events. The U.S. manufacturing PMI readings fed on the positive risk sentiment as the data revealed that business activities continued to expand at a robust pace in October. However, the ‘Prices Paid’ component of the ISM PMI survey jumped from 81.2 to 85.7, flagging that input price pressures continued to increase during the month of October. The U.S. Treasury yields sustained levels, consolidating around 1.5%, after a short-lived pullback retracement during the second half of the trading session. The S&P 500 and Dow Jones Industrial Average indexes edged higher, recording fresh new all-time highs to kick off the week on the right foot amid surging energy stocks underpinned by sustained energy prices. However, from the early trading hours of today, it suggests that market participants have turned cautious, as the U.S. stock index futures are falling 0.2% and 0.3% ahead of major monetary policy events.


The shared currency capitalized 0.48% against the greenback during yesterday's trading session, amid restoring risk sentiment fed by solid data in the U.S., and the pair was consolidating during the early hours of today’s session. Additionally, German Retail Sales slumped in September, helping the European Central Bank (ECB) to stand pat. However, a recent increase in COVID-19 cases in Germany keeps easing monetary policy, making them struggle to consolidate, especially amid sustained inflation and concerning energy prices. Coming up, market participants will remain tuned to the second reading of October’s PMI for Germany and Europe, although major attention will be given to the stimulus and inflation chatter, not forgetting the ECB headlines.  


The British Pound continues to extend losses against the greenback amid ongoing frictions between Britain and France, which continue to linger. President Emmanuel Macron announced that the French Government postponed planned sanctions on the U.K. to give more time to negotiators from both sides to work on new proposals and finish making arrangements. However, market participants remain anxious ahead of the Fed’s and BoE’s showdown later this week, especially as expectations continue to mount over policymakers. The CME’s BoE Watch tool showed a 100% probability of a rate hike move during the November and December meeting, as inflation is expected to hit 5% before the end of the year, way above its 2% target. However, the jump in U.K. Covid infection from 38k to 40k in the last 24 hours challenged the likelihood of a move by the “Old Lady”. 


The Japanese Yen continues to trade sideways, suffering mild losses during the early hours of today's session amid the release of Bank of Japan Minutes. The Bank of Japan Monetary policy meeting minutes didn’t offer any surprises for market participants. Many policymakers said pent-up demand is yet to materialise in Japan. Nevertheless, the risk-averse market environment is helping the JPY stay resilient against its rival sustaining current levels against the greenback during the past few weeks. 


The Canadian Dollar remained subdued against the greenback during the early hours of today’s trading session despite hawkish expectations from the Bank of Canada. The decision from policymakers to end QE and to consider interest rate hikes before previously anticipated is likely to provide near-term support to the Loonie as long as crude oil prices remain high. While there is potential for the oil to extend further gains, several analysts see crude oil prices dropping next year as U.S. supply returns into play. 


The Mexican Peso licked its wounds during the early hours of today's session, after dropping 1.55% during Monday's session against the dollar amid concerns of a limping economy. The Peso is looking to close its seventh consecutive session of recording losses, as the currency depreciates amid increasing concerns about the health of the Mexican economy after it was reported last week that there was a Gross Domestic Product contraction for the time since the recovery from the pandemic began. Additionally, inflation remains elevated, forcing Mexican policymakers to tighten monetary policy amid fears of stagflation.  


The Chinese Yuan traded sideways against the dollar ahead of key central bank decisions and Chinese authorities provided guidelines to local banks. The People's Bank of China has provided window guidance to local banks on property loans amid the ongoing real estate crisis in the country. Authorities flagged that a surge in Chinese junk dollar bond yields in October, briefly reaching 20%, has made it all but impossible for stressed developers to refinance their maturing debt. Such firms have just over USD 2 billion of onshore and dollar bond payments due in November. 


The Brazilian Real depreciated 1% during yesterday's trading session amid fiscal concerns and political instability in the country. Brazil’s Central Bank released its latest update on the country's fiscal situation, reporting a USD 2.28 billion surplus in September. The report breaks down the surplus in central government accounts, state governments, and state-owned companies, with the last group raking in USD 1.8 billion. Despite showing a positive surplus, plans from the Bolsonaro government to provide Auxilio Brasil could erase the surplus, compromising the fiscal situation in the country.  


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