Daily Market Pulse

U.S Federal Reserve keeps monetary policy unchanged

5 minute read


Yesterday, the market was filled with concerns ranging from tensions about a short-squeeze among hedge funds, worries about corporate earnings, and delays in Covid-19 vaccinations in the U.S. This narrative was wrapped up with the U.S Federal Reserve holding monetary policy unchanged and signaling some concern about the pace of economic recovery. As a result, the USD found a strong bid and edged up 0.53% while the S&P 500 Index recorded its worst performance since October, with the gauge down 2.6%. Today, it will be interesting to closely watch the week’s U.S jobless report and the first estimate of fourth-quarter GDP, which is expected to show that the economy grew by 4% on an annualized quarter-on-quarter basis. 


Among the main catalysts, the European Central Bank policymakers’ hinted for further negative rates and the Fed’s dovish halt was the main propeller behind the U.S dollar. The common currency slid 0.41% against the USD on Wednesday. Meanwhile, the U.K-EU tussle over the lack of vaccine in the block also weighed on the EUR. The EU committee accused AstraZeneca of using European funding intended for the development of manufacturing capacity to ramp up production in its U.K. plants, and now prioritizing British deliveries. The impasse could mean further delays to an already-sluggish inoculation campaign in the bloc. Elsewhere, weaker than expected German Consumer Confidence didn’t help sentiment, although a soft report was expected, due to recent lockdown measures in the country. Later today, Germany and Spain consumer price inflation will be eyed, though inflation is not the most important point on the ECB agenda.


The Cable printed losses (-0.36%) amid a defensive tone that was seen across the markets, which favored the USD, on Wednesday. What predominated in the narrative yesterday were the U.K.-EU tension over the lack of Covid-19 vaccines and, on the economic side, the U.S Federal Reserve made it clear that the U.S. central bank was nowhere near leaving the massive support for the economy during the ongoing coronavirus pandemic. Furthermore, having the Fed flagged a moderate U.S recovery, the broader market notched a sizable decline yesterday.


The soured market mood, along with persistent Covid-19 outbreaks in Japan, where a third wave is claiming more lives at a much faster pace than last year, were the main catalysts exerting downside pressure on the Japanese Yen, on Wednesday. The JPY edged down 0.44% against the greenback. On the radar, vaccine rollouts have not progressed in Asia, including Japan, as quickly as they have in the West, and worries are growing about a tug-of-war for the products from Pfizer, Moderna, and AstraZeneca.


It’s worth mentioning that the downbeat mood seen yesterday across the market favored the US dollar and put additional pressure on the CAD which slid 0.84% against its U.S counterpart. The sour mood also weighed on commodities, taking the West Texas Intermediate crude oil down and exerting extra downside pressure on the Loonie.  Domestically, Canada lags most of the G-10 countries in the number of people vaccinated and is also at the back of the line for vaccine deliveries. Yesterday, Prime Minister Justin Trudeau said he remains confident in Canada's vaccine supplies despite threats from Europe that it might impose export controls on vaccines produced on that continent. In general, that suggests a delay in Canada’s economic recovery.


The Mexican peso fell 1.54% against the USD after risk appetite was subdued by a more cautious stance from the U.S Federal Reserve, on Wednesday. The MXN also reacted to mixed remarks from Mexico’s Central Bank (Banxico), which ratified the country's short-term economic policy needs to be focussed on attracting more investment and reducing internal economic uncertainty to help steer a sustained recovery from the impact of the Covid-19 pandemic. Banxico also said inflation shocks have complicated the monetary policy and warned that the Mexican economy would continue to face an uncertain environment in 2021. Later today, the National Institute of Statistics will post Trade Balance figures.


The Chinese yuan gave back the gains from the day before, after closing down 0.29% against the U.S dollar on Wednesday. The risk-off sentiment faded as doubts over the U.S economy in the short term left markets cautious. The price action was catalyzed by the U.S. Federal Reserve’s decision to keep monetary policy unchanged at near-zero as expected, but flagging a slowdown in the pace of the U.S economic recovery. Apart from the soaring Covid-19 cases in the country, the lack of domestic headlines should drive the CNY to trade closer to the USD.


Brazilian real slid more than 1% against the greenback on Wednesday, influenced by the U.S Federal Reserve’s decision. The Fed left its key overnight interest rate near zero and made no change to its monthly bond purchases. The Fed’s more cautious outlook for growth weighed on the riskier assets, such as the BRL. Also, the recent Foreign direct investment (FDI) data did not help the BRL. The figure totaled U$34.2bi in 2020, a 50% drop compared to 2019, which meant that new foreign investments in the Brazilian economy may have been postponed or rethought during the pandemic. Today, labor market conditions will be released and expected to drive interest. 


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