Daily Market Pulse

Dollar retreats amid risk sentiment recovery

5 minute read


The U.S. dollar index, a common tool used to benchmark the performance of the greenback against its major peers, eased momentum and fell back 0.23% after failing to break Tuesday highs during yesterday’s trading session. The market mood continues to recover, allowing the dollar to retreat as investors shift to a risk-on stance. The U.S. equity markets posted gains for two consecutive sessions after Monday’s significant correction. Corporate earnings continue to exceed expectations which keep the mood on a positive note, although markets eye Covid headlines as risks still remain latent. Additionally, the USD 1.2 trillion bipartisan infrastructure bill remains under negotiations as senators rejected its opening debate, although it is reportedly in its last stretch. Coming up, weekly jobless claims figures are the main data release following Chicago Fed National Activity Index and Existing Home Sales.  


The EUR advanced 0.14% against the greenback amid a shift in risk sentiment and positive earnings results from companies. The European Central Bank (ECB) is set to announce its first interest rate decision following its strategic adjustment. The change allows inflation to hover around 2% instead of setting a ceiling at the mark. Christine Lagarde, President of the ECB, hinted at potential developments in relation to the policymakers bond-purchase programme in addition to communication changes. However, investors remain cautious ahead of the ECB interest rate decision, which is expected to leave rates unchanged, although market participants will focus on Christine Lagarde’s monetary policy press release which is expected to drop a dovish tone.   


The British Pound rallied 0.66% against the dollar as risk sentiment recovers and investors seek to add risk to their portfolios. Brexit minister David Frost said that the U.K. government is keen on renegotiating the Northern Ireland Protocol as it is causing issues. The spokesman told the House of Lords that Britain could justify overriding the arrangement, but that the government will hold off on doing so for now.  The E.U. pushed back on the comments from the U.K. head negotiator and made it clear that it would not agree to a renegotiation of the protocol. Moreover, Covid woes in Britain took a breather as cases sustained at 40,000 new cases per day, easing down the spread of the virus which reported last week over 50,000 daily cases. 


The Japanese Yen continues to retrace against the dollar as investor risk appetite recovers and the safe-haven appeal weighs on the currency, posting 0.43% losses during yesterday’s trading session. Tokyo authorities reported the highest covid figures since the beginning of the year, with 1,832 new daily cases, increasing over 60% in the past week amid the Olympic games. Tokyo and other regions are already operating under a state of emergency but given the rising infections, health officials are concerned that things are about to get worse. Moreover, Bank of Japan (BoJ) minutes showed that policymakers were divided on the Japanese inflation outlook as rising commodity costs and renewed state of emergency weigh on a fragile recovery.  


The price of the Loonie soared 0.9% yesterday against the greenback amid risk-on sentiment in the global markets which have aided crude oil prices recovery. The West Texas Intermediate (WTI) rallied 5.76% during yesterday's trading session, underpinning the Canadian dollar to post solid gains as investors regain confidence. A light economic calendar suggests that risk sentiment will continue to drive the price of the Loonie, as second-tier data releases are expected to have little impact on the pair. Market participants eye tomorrow’s Retail Sales data which is expected to contract 3.1% on a monthly basis.  


The Mexican Peso managed to close out yesterday’s session virtually unchanged (0.05%) against the dollar, after falling 0.6% during the early hours of the session and reverting the move as risk appetite restored confidence in global markets. Andres Manuel Lopez Obrador (AMLO), President of Mexico, responded to the espionage scandal that revealed Enrique Pena Nieto, former Mexico’s President, spied on AMLO and thousands of others through the spyware Pegasus. Between the findings, at least 50 people linked to AMLO, including his wife, children aides, and doctor were intercepted when he was leading the opposition before being elected president. Moreover, analysts have increased Mexico’s growth outlook for 2021, adjusting from 5.9% to 6% by the end of the year. 


The onshore Yuan closed 0.17% higher against the greenback following an improved risk-on stance from market participants. Analysts report that China and the U.S. are shipping goods to each other at the fastest pace in years, making the world’s largest bilateral trade relationship seem as if the tariff war and pandemic were things of the past. However, devastating floods in the Henan region are expected to bring disruption to industrial and agricultural production, although given its localized and temporary nature of the disaster, market participants don’t expect this to derail China’s economic recovery in the second half of the year, nor cause meaningful spikes in inflation. 


The Brazilian Real advanced 0.73% against the dollar amid risk appetite recovering in global markets and easing Covid woes as the health minister reported a slow down in infections. As the economic calendar remains clear for the day, risk perception drivers will continue to drive the pair as well as any developments on the ambitious U.S. infrastructure bill. Tomorrow, market participants will be tuned to mid-month inflation figures which are expected to post 0.65% growth vs 0.83% previously reported. 


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