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Powell set to control inflation

USD

The greenback capitalized against most of its peers during yesterday's trading session. The U.S. dollar Index, a coefficient used to gauge the valuation of the greenback against a basket of six major currencies closed 0.69% higher and gains seem to consolidate on Wednesday morning ahead of all important FOMC. Fed officials are expected to announce another 75 bps interest rate hike after chair Powell’s message on accepting pain to pin down inflation is set to boost the dollar further, even if it results in recession.

EUR

The common currency fell 1.01% throughout Tuesday's trading session amid a stronger dollar underpinned by another rate hike from Fed officials, although prospects of a recession keep investors cautious. Moreover, the Euro lost support following the news that the outlook on Italy’s sovereign debt ranking was lowered by S&P Global Ratings after recent political turmoil led to the resignation of the Prime Minister and calling for fresh elections, risking once again establishing a populist government.

GBP

Cable trades sideways, stepping back 0.12% yesterday and pairing those losses in the early hours of today. The market mood remains cautious as investors expect another interest rate hike in the U.S. while the race to No. 10 downing street continues. Lizz Truss plans immediate tax cuts, an initiative that her own supporters acknowledge would force interest rates higher than anticipated. Economists believe that the BoE will need to increase the benchmark rate to 3.25% to counterfeit the impact on the stimulus, a dangerous threshold area for a number of mortgage payers. 

JPY

The Japanese Yen sustain mild pressure against the dollar, recording its second consecutive session closing lower and the trend sustains ahead of the Fed interest rate decision. Fed officials could make a hawkish surprise and hike rates by 1%, which could push stocks lower leading to yen buying in a haven trade, although if FOMC decides to announce 75 bps we could see a slight appreciation of the dollar which should dissipate soon after the announcement.

CAD

The CAD gave back some of its recent gains on Tuesday after investors turned cautious on the eve of the Federal Reserve´s interest-rate decision. Today, WTI crude oil stays firmer around $95.5/barrel this morning as concerns about weaker demand offset industry figures that showed a larger-than-expected drawdown in US crude stockpiles. Looking ahead, market participants might pay attention to the US Durable Goods Order data for June, as well as what Fed Jerome Powell will deliver today - mainly how Fed manages to tame inflation and their approach surrounding the Europen energy crisis.

MXN

The peso remains in the green territory, after advancing +0.04% against the greenback for a third day, posting its longest winning streak in more than a month. The swap curve is already fully pricing 75bps Mexico´s Central Bank rate hikes in August which lends strong support to the currency due to the carry. Nonetheless, some market players are turning more cautious about the country´s sovereign bonds due to the uncertainty of trade negotiations with the US and Canada regarding energy policies. On that note, this is another key driver for the MXN, as it brings expectations around a surge in foreign direct investment.

CNY

Yesterday, the CNY was under pressure as the dollar resurfaced on the eve of the FOMC meeting, and risk aversion gripped the market with the sharp decline in US equities. In this context, current concerns about global growth persist and are expected to remain the main driver today. Meanwhile, the cost to borrow in the overnight repo market dropped below 1%, suggesting there is so much cash in China´s banking system but little demand for loans. Companies and consumers are reticent about the economy amid scattered Covid outbreaks.

BRL

The BRL saw again a correction on Tuesday, with the currency recovering 0.56% against the dollar. The BRL continued to outperform its pairs, as the dollar continues to show strong gains against the currencies of Latin American countries, which have been heavily penalized recently due to increased political risks in the region. Meanwhile, the market digested the mid-July inflation rate which decelerated more than expected, 0.13% m/m vs. 0.69% prior. As a result, Brazil’s swap rates dropped by more than 20bps, taking a breath from the recent upward trend. Looking ahead, focus is on the Federal Reserve policy decision as traders await cues on the rate outlook and its impact on the USD.

 

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