Daily Market Pulse

Dollar strengthened ahead of Powell’s big finale

7 minute read


The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, rallied 0.27% during Thursday’s trading session amid U.S. data releases, terror attacks in Afghanistan, and eagerness from investors to hear Fed Chair Powell’s plans on tapering. Datawise, the annualized Gross Domestic Product figures missed expectations by 0.1%, due to supply chain bottlenecks and inventories shortages, releasing 6.6% annualized growth, while Q2 growth results outperformed expectations by 0.2% amid improving conditions. Jobless claims were pretty much bang on market consensus, without any relevant changes from previous releases.  The data underpinned a move in favour of the greenback, which was also supported by the tragic news from Afghanistan reporting terrorist attacks in the Kabul airport, killing 85 people in the blast from two suicide bombs which dampened the market mood. President Joe Biden pledged to hunt down those responsible for the attacks, while several global leaders have condemned the attacks and prepared their last moves before departing from Kabul, although several eligible refugees will be left behind by the ally forces. Despite the disturbing news from Afghanistan, market participants will stay tuned to the unfolding of the Jackson Hole Symposium, which is due to release its big finale today with the Speech from Jerome Powell and his plans around tapering. Several committee members have all spoken in favour of reducing the bond purchase programme, including Kaplan reversing some of his “less hawkish” comments from last week. However, market participants believe that at this stage, Chair Powell can’t signal a tapering start date today because the Fed first needs to see an improvement in labour data, which has remained sustained (not improved) during the past releases. Transitory inflation, insufficient progress to taper, and Delta variants risks are expected to be usual points that Powell is likely to touch, although surprises around the release of Core PCE (Personal Consumption Expenditures) - the Fed’s preferred gauge of inflation - could change these fundamentals and Powell’s approach.  


The common currency retraced 0.16% against the dollar after four consecutive sessions of recording gains. Better than expected Q2 GDP figures in the U.S. lent extra strength to the dollar, while U.S. 10 years Treasury yields edged higher amid hawkish comments from Fed officials throughout the Jackson Hole Symposium. On the other hand, the European Central Bank released its minutes from the latest meeting, noting that the economic recovery in the bloc remains on track, although members see upside risks when it comes to inflation due to sustained global bottlenecks in the supply chain. The minutes also showed that there was practically no discussion around reducing the amount of stimulus being deployed into the economy, although it could be reassessed at the September meeting. For now, all eyes are on Jerome Powell’s speech and his plans of tapering.


The British Pound fell 0.45% against the greenback amid a broader dollar strength derived from the U.S. GDP data and hawkish comments from Fed officials around tapering ahead of Powell’s intervention later today, and Brexit woes dampening the Sterling potential. Dallas Fed President Robert Kaplan remained firm regarding the recovery of the U.S. economy and asserted that the bank should start tapering in October, while Fed’s Bulliards proposed U.S. inflation was substantially higher and expected to finish asset purchase by March 2022. Comments from Fed officials underpinned U.S. treasury yields, weighing on the cable which failed to gain from the reduction of Covid cases in their latest round of data. Additionally, the British mood remains dampened as U.K leaders reported that Britain’s post-Brexit supply chain crisis could hamper “Christmas celebrations”, which could cause shortages until next year.


The Japanese Yen remained subdued against the greenback amid U.S. treasury yields edging higher following comments from Fed officials and encouraging U.S. data underpinning the greenback amid a risk-on mood. Additionally, the Tokyo Consumer Price index failed to impress, releasing a contraction of 0.4% annualized while the market expected it to remain unchanged. The poor inflation data weighed on the Yen as investors built expectations for the closeout of the Fed’s showdown. The negative trend extends today as the market sustains pressure over the Yen ahead of the Jackson Hole Symposium big finale, where Jerome Powell will provide his views over tapering alongside interpretation from the release of Personal Consumer Expenditure Core Index - the Fed’s preferred gauge of inflation.  


The Canadian Dollar had a sharp retracement against the dollar during yesterday's trading session, closing 0.76% lower amid a broader strength of the dollar and commodity prices taking a breather after the strong performance of this week. Hawkish comments from Fed officials suggesting tapering on the bond purchase program keep U.S. treasury yields higher, feeding the dollar. Additionally, the West Texas Intermediate (WTI) trades in a relatively tight range around USD 68 per barrel, allowing any developments in the dollar to drive the pair.  


The Mexican Peso retraced 0.64% against the greenback amid broader dollar strength, underpinned by hawkish dovish comments by Fed officials suggesting tapering. The Mexico national statistics institute released the latest figures for Q2, missing expectations by 0.2% on an annualized basis.  The reports also showed that the global index of economic activity, a proxy of GDP, grew by 13.4% compared to June 2020, while it contracted 0.9% in seasonally adjusted terms compared with the previous month. Moreover, the government announced that it will begin a technical dialogue with the White House to address the flow of ordered, safe, and regular migration through the U.S.-Mexican border. 


The Chinese Yuan stepped back 0.1% against the greenback amid a broader dollar strength following comments from Fed officials at the Jackson Hole Symposium and expectations on the outcome from Powell’s tapering plans, which will directly affect monetary policy from the People's Bank of China. However, the latest injection in liquidity from Chinese policymakers keeps bonds on the front foot, recording gains as Reserve Rate Requirement (RRR) signaled easing repo rates. China has made significant progress in containing the Delta variant, leading to some relaxation in the measures and relief for the economy and its prospects of recovery. However, conditions remain strained with internal demand showing weakness in consumption, job markets remaining subdued, and production indicators failing to impress. 


The Brazilian Real erased 0.66% from previous gains against the dollar amid a broader demand for the greenback. This comes off the back of strong data and tapering expectations ahead of key intervention from the Chairman of the Fed later today. Additionally, the political turmoil in the country continues as the senate archives the impeachment request. Rodrigo Pacheco, President of the Brazilian Senate, announced that they had decided against taking up an impeachment request presented by President Bolsonaro against supreme court magistrate Alexandre de Moraes. 


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