Daily Market Pulse

Dollar surges to one month high on Fed’s decision


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.54% higher after the Fed’s interest rate decision and continues to outperform its rivals on Thursday morning. The dollar index rose to one-month highs and extended its gain as the Federal Reserve indicated that it will likely raise interest rates in March and begin shrinking its balance sheet soon after. The combined measures will complete the transition from the soft monetary policy that prevailed throughout the pandemic period to an inflation-fighting mode. Following that, the benchmark 10-year U.S. Treasury yields returned to above 1.8%, providing new support for the dollar. Meanwhile, investors believed the Fed fell short of providing the required clarity on the timing and scope of the policy move, leaving the door open for a more gradual pace of policy tightening. Moving ahead, the U.S. Bureau of Economic Analysis will issue its preliminary estimate of fourth-quarter GDP growth, which is estimated to be 6% year on year, while the US Census Bureau will report Durable Goods Orders data.


The Euro closed 0.54% lower on Wednesday and dropped further down during Thursday morning. The major currency dropped at the end of January, hovering around its weakest level since June 2020, as investors flocked to the U.S. dollar after the Federal Reserve signaled it would begin tightening policy in March. This comes as Fed Chair Jerome Powell stated there was "quite a bit of room to raise interest rates”. Additionally, the Euro was already under pressure this week as statistics showed a dramatic slowdown in the Eurozone's economic growth in January, with fears of a military conflict in Ukraine weighing on riskier currencies. Elsewhere, Eurozone money markets have priced in two 10-basis-point rate increases from the European Central Bank (ECB) by the end of the year. Moving on, there is no major data release from the Eurozone. As such, the U.S. dollar valuation will keep influencing the Euro prices further. 


The Pound Sterling closed 0.28% lower before extending its losses on Thursday morning. The British Pound fell to its lowest level since the end of December, as investors after the Federal Reserve announced a March interest-rate hike decision to combat inflation. At the same time, geopolitical tensions between Western leaders and Russia over Ukraine weighed on sentiment, as well as mounting political uncertainty in the UK, where Prime Minister Boris Johnson is bracing for the outcome of an investigation into Downing Street parties during the 2020 lockdowns. In other news, investors expect that the Bank of England will raise interest rates again in February after data showed that UK consumer inflation surged to a near 30-year high last week. Moving on, wider market sentiment and political headlines will provide fresh impetus to Sterling. 


The Japanese Yen closed 0.67% lower yesterday. The currency extended losses against the greenback on Thursday, after falling sharply the previous session, as the U.S. dollar rallied against major peers following the Federal Reserve's announcement that it would likely raise interest rates in March and begin reducing its balance sheet shortly thereafter. Late last year, the Japanese Yen came under significant pressure as major nations announced their willingness to tighten monetary settings, while the Bank of Japan vowed to retain its ultra-easy monetary policy in order to reach its 2% price stability target. Meanwhile, the Bank of Japan warned of broadening inflationary pressures in its latest quarterly outlook report, projecting core consumer prices to hit 1.1% for the fiscal year ending March 2023, and warning that inflation could accelerate faster than expected if raw material costs continue to rise. Moving on, the Statistics Bureau of Japan will release Tokyo’s Consumer Price Index, which is expected at 0.6% annually, to influence Yen prices further. 


The Loonie closed 0.32% lower followed by extending its momentum modestly on Thursday morning. The Loonie failed to applaud the Bank of Canada's (BOC) hawkish decision on Wednesday, as the U.S. Federal Reserve (Fed) met the market's optimistic expectations. However, the robust price of WTI (West Texas Intermediate) crude oil, Canada's principal export commodity, saves the currency from falling further. The Bank of Canada said on Wednesday that it will maintain its benchmark interest rate at 0.25%, as most economists, analysts, and traders had predicted. The BoC reiterated that it expects slack to be absorbed in the middle quarters of 2022. Furthermore, the bank expects CPI inflation to stay strong in H1 2022 before easing back to 2% in H2. Meanwhile, although the U.S. Fed has kept the interest rate intact, it has signaled a rate hike in the near term, reflecting its hawkish stance. Moving on, wider market sentiments and crude oil prices will further influence Loonie prices.  


The Mexican Peso finished 0.62% lower, although it regained its upbeat momentum modestly on Thursday morning. The Mexican Peso traded at its lowest level against the greenback since December 28th, amid a stronger dollar following the Fed's expected announcement. The Fed announced that rates may be raised for the first time in more than three years and that it will continue to withdraw its ultra-easy economic support. Meanwhile, early statistics suggested that the Mexican economy likely declined 0.2% in December, implying a lackluster performance in the fourth quarter of last year. At the same time, JP Morgan warned in recent research that the Mexican economy faces a potential credit downgrade in the medium term as a result of political developments, particularly the anticipated passage of a controversial energy bill.


The Chinese Yuan closed 0.03% higher on Wednesday. The Yuan depreciated against the dollar on Thursday and was on track for its biggest one-day loss since June 2021, as the U.S. dollar rallied widely against major peers following the Federal Reserve's announcement that it would likely raise interest rates in March and begin reducing its balance sheet soon after. Meanwhile, the strong hawkish outlook in the United States contrasts with China's policy easing measures, as the government tries to cushion a faltering economy. The People's Bank of China cut many major short and medium-term interest rates, with analysts anticipating additional easing measures and a drop in the reserve requirement ratio. The Yuan's year-to-date gains, which have been driven by strong corporate demand, a growing trade surplus, and robust exports, have been erased by today’s drop.


The Brazilian Real closed 0.23% lower against the greenback on Wednesday. The Brazilian Real depreciated following the Fed's expected announcement. The Fed announced that rates may be raised for the first time in more than three years and that it will continue to withdraw its ultra-easy economic support. Domestically, mid-month consumer price data indicated that inflation reached 10.2% year on year, exceeding market expectations but slowing from 10.42% the prior period. Yet, inflation remained significantly above the central bank's objective of 3.5% reinforcing the case for the central bank to maintain its tightening monetary policy stance, limiting potential losses for the Brazilian currency. Since the beginning, the Brazilian central bank has increased borrowing costs by 725 basis points (bps) and is likely to deliver at least one more 150-bps boost during its upcoming monetary policy meeting.


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