Daily Market Pulse

Dollar silent ahead of Fed meeting

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.05% higher before losing its steam on Wednesday morning ahead of the Fed’s monetary policy decision. The U.S. dollar benefited from safe-haven flows and touched its highest level in more than two weeks yesterday. However, it has since receded and entered a consolidation phase this morning, tracking the sliding of Treasury yields. Meanwhile, investors anticipate that the Fed will maintain its current interest rate in its FOMC (Federal Open Market Committee) meeting today. Additionally, they will be on the lookout for clues on the magnitude and timing of rate rises and quantitative tightening. Money markets are pricing in a March rate rise, followed by three further quarter-point hikes by year's end. Elsewhere, rising geopolitical tensions boosted the safe-haven dollar as well, with the U.S. President Joe Biden threatening to sanction Vladimir Putin if he orders an invasion of Ukraine. Moving on, the Fed’s interest rate decision will be followed by weekly MBA Mortgage Applications, December’s Flash Goods Trade Balance, and New Home Sales.


The Euro closed 0.22% lower and extended its downtrend modestly during Wednesday morning. The Euro sank to its lowest level in a month on Tuesday, weighed down by global risk aversion sparked by geopolitical tensions between the West and Russia. Additionally, the Euro trades in the red for the third consecutive session on Wednesday, amid widespread caution ahead of the critical U.S. Federal Reserve meeting later in the North American session. The persistent sell-off for the major currency is in reaction to the U.S. dollar's continued rebound. Meanwhile, the Fed’s meeting serves as an immediate stimulus for Euro price movements, while geopolitical concerns surrounding the Russia-Ukraine war continue to influence macro sentiment in global markets. Following that, domestically, French Consumer Confidence dropped slightly to 99 in January, while Unemployment Benefit Claims are due to be released today, followed by Germany’s 10-year Bund Auction.


The Pound Sterling closed 0.10% higher before consolidating its gains on Wednesday morning. The British Pound rebounded from a monthly low the previous day, amid mounting talk of the Bank of England's (BOE) rate rise and the political establishment expressing a less-than-unfavorable sentiment towards UK’s Prime Minister Boris Johnson. Meanwhile, as pre-Fed anxiety becomes the primary weight on Sterling's pricing, bearish fears about Brexit and UK politics also contribute to the currency's negative pressure. On the contrary, Sterling prices may benefit from the UK's lowering of Covid-related entrance restrictions for foreign entrants, as well as discussions on Britain's post-Brexit trade deals with the U.S. and India. Elsewhere, France's European affairs minister Clement Beaune reiterated France's opposition to post-Brexit fishing legislation. Additionally, Maros Sefcovic, the UK's Brexit negotiator, is frustrated with the UK after another week of meetings with Liz Truss that produced no result. Moving on, traders will closely monitor Fed Chair Jerome Powell's speech, which will influence Sterling prices further. 


Although the Japanese Yen closed 0.06% higher yesterday, it lost its pace on  Wednesday morning. The Japanese Yen eased against the U.S. dollar on Wednesday, after reaching a five-week high earlier this week, as markets prepared for a Federal Reserve tightening of monetary policy. Meanwhile, the risk barometer pair fell for the second straight day, weighed down by geopolitical threats originating from Russia and Omicron troubles in Japan, not to mention the International Monetary Fund's dismal economic expectations (IMF). Additionally, the Bank of Japan (BOJ) stated in its Summary of Opinions that uncertainty about Japan's economic outlook is increasing as a result of a rise in Omicron coronavirus cases and that the BOJ must take additional easing measures as necessary to maintain current forward guidance on interest rates and monetary base commitments. Looking forward, the Fed's actions will be critical for the Yen’s prices, while sentiment data from Japan and the trade figures from the U.S. might provide intermediate moves.


The Loonie closed 0.07% higher followed by extending its momentum on Wednesday morning. The Loonie stopped a three-day losing streak the previous day as the price of Canada's primary export, WTI crude oil, increased to its highest level in a week. Additionally, the market's hesitation ahead of the Bank of Canada's (BOC) and U.S. Federal Reserve's (Fed) monetary policy meetings favored the Loonie. On early Wednesday, the Loonie continued its advances toward an intraday high, backed by the BOC’s hawkish approach towards fighting inflation. Additionally, the Canadian currency gains from the general weakening of the U.S. dollar while following U.S. Treasury rates. Meanwhile, investors anticipate that the Bank of Canada will increase its policy rate by 25 basis points today. The futures market has priced in an increase of almost 70%, implying considerable upside potential for the Loonie. Elsewhere, escalating geopolitical tensions and equity market instability will undoubtedly weigh against any Loonie appreciation.


The Mexican Peso finished 0.21% lower, although it regained its upbeat momentum modestly on Wednesday morning. The Mexican Peso strengthened slightly versus the dollar, aided by lower U.S. Treasury yields. Meanwhile, the foreign currency markets are anticipating the announcement of the U.S. Federal Reserve's monetary policy on Wednesday, which is likely to include a series of rate hikes, which would subsequently strengthen the dollar and affect developing currencies such as the Mexican Peso. Elsewhere, Mexico's economic activity increased by 1.7% year on year in November 2021, after a downwardly revised 0.6% decline the previous month and above market forecasts of a 0.8% gain. It was the largest expansion in economic activity since August, aided by a robust rebound in primary activities. 


The Chinese Yuan closed 0.04% higher on Tuesday. On Wednesday, the Yuan traded at a more than three and a half-year high, boosted by a stronger central bank fixing and robust corporate demand ahead of the Lunar New Year vacation. On Wednesday, the People's Bank of China fixed the midpoint at 6.3246 Yuan to the dollar, 0.27% higher than the previous fix of 6.3418 and the highest level since April 2018. The action sent a message to markets that Chinese policymakers looked to be more tolerant of the currency's rise. Meanwhile, the Yuan continued to strengthen despite Beijing's policy easing, with the central bank reducing many key short- and medium-term interest rates to spur development. Elsewhere, analysts anticipate the PBOC to accelerate its easing measures in the first half of the year, with more rate cuts and a decrease in the bank's reserve requirement ratio in the first quarter.


The Brazilian Real surged 1.05% against the greenback on Tuesday. This is because domestic operations have been lagging behind the day-to-day depreciation of the U.S. dollar overseas, due to the ongoing flow of foreign capital into emerging markets. The market mood remained negative once again in the face of Russia's growing tensions with Ukraine, and Western nations fear another Russian invasion of a neighboring country. Tensions regarding the U.S. interest rate were added to this mix. This Tuesday marked the commencement of the U.S. Federal Reserve's two-day meeting, which might result in a rate rise and more aggressive removal of stimulus measures from the economy. Elsewhere, on the statistics front, in January, Brazil's seasonally adjusted FGV consumer confidence index dropped to a nine-month low of 74.1 points, showing greater pessimism about the future’s general economic condition.


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