Daily Market Pulse

Dollar surges after strong GDP data


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.65% higher after the release of strong U.S. economic data and continues to gain modestly on Friday morning, hovering near levels last seen in July 2020. This comes as the Federal Reserve suggested on Wednesday that it would likely raise interest rates in March and begin decreasing its balance sheet soon after. Furthermore, the dollar was additionally supported by positive U.S. data, which indicated that the economy expanded at an annualized pace of 6.9% in the fourth quarter against expectations of 5.5%. Meanwhile, the market mood is being weighed down by the ongoing conflict between Russia and Ukraine. On Thursday, U.S. Vice President Joe Biden stated that there is a "distinct possibility" that Russia may invade Ukraine in February. Moving on, the U.S. Bureau of Economic Analysis (BEA) will release the December Personal Consumption Expenditures (PCE) Price Index, which is predicted to rise by 6.1% year on year, followed by Personal Spending and Personal Income numbers to drive dollar prices further. 


The Euro closed 0.87% lower before consolidating its losses on Friday morning. The Euro fell to its lowest level since June 2020, as investors rushed to the U.S. dollar after the Federal Reserve suggested that policy tightening will begin in March, with Chair Jerome Powell saying there was "quite a bit of room to raise interest rates." The major currency was already under pressure this week as statistics showed a dramatic slowdown in the Eurozone's economic growth in January, as fears of a military conflict in Ukraine weighed on riskier currencies. Meanwhile, loans to households in the Eurozone increased 4.1% year on year in December 2021, which barely changed from the previous month's 4.2% growth, which, combined with August's rate, was the biggest increase since November 2008. Elsewhere, Eurozone money markets have priced in two 10-basis-point rate increases from the European Central Bank by the end of the year. Moving forward, the Business Climate and Consumer Confidence Index for January will be featured to drive the Euro prices during the weekend. 


The Pound Sterling closed 0.54% lower before reversing its corrective pullback on Friday morning. The British Pound gave up its tiny intraday gains and reverted to the monthly low area, unable to capitalize on its attempted rebound move in the face of widespread bullish sentiment around the U.S. dollar. Furthermore, the British Pound was weighed down by mounting calls for UK Prime Minister Boris Johnson's resignation in the aftermath of a series of lockdown parties in Downing Street. Meanwhile, hopes that the Bank of England may raise interest rates during a period of record-high inflation aid to limit further losses. Looking forward, in the absence of any significant market-moving data from the UK, U.S. dollar price dynamics will continue to play a significant role in affecting the Sterling prices. 


The Japanese Yen closed 0.62% lower yesterday. The currency extended losses past the U.S. dollar on Friday, heading for its worst weekly drop since October 2021, as the U.S. dollar rallied against major peers following the Federal Reserve's announcement on Wednesday that it would likely raise interest rates in March and begin shrinking its balance sheet soon after. 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 the central bank's 2% price stability target. Meanwhile, after the Federal Reserve's hawkish shift in interest rate expectations, Japan's 10-year government bond yield climbed to a 48-week high of 0.163%. Still, the Bank of Japan's goal of keeping yields within a 0.25% range, made feasible through secondary market debt purchases, has helped keep yields from climbing too much.


The Loonie closed 0.56% lower followed by it extending its losses on Friday morning. The Canadian dollar was trading not far from a one-month low level recorded on January 5th, as the U.S. dollar strengthened. After stronger-than-expected U.S. Q4 GDP growth confirmed a more hawkish Federal Reserve posture, the greenback rose near levels not seen since June 2020. Domestically, the Bank of Canada held interest rates constant in its first 2022 meeting, surprising some investors, but it signaled that an increase is on the way, most likely around March 2nd. Meanwhile, Canada's CFIB's Business Barometer long-term index, which is based on a 12-month forecast, fell 8.3 points to 54.3 in January 2021, the lowest level since October of 2020. Aside from additional restrictions and persistent labour shortages, many businesses are reporting supply chain issues. Moving ahead, U.S. data release and wider market sentiments will drive Loonie prices further.


The Mexican Peso finished 0.06% lower followed by it extending its losses on Friday morning. In the face of a strengthening dollar, the Mexican Peso traded near its lowest levels since December 21st. Meanwhile, Fed Chairman Powell indicated yesterday that the central bank will tighten monetary policy faster than expected, with some market participants already pricing on five rate hikes this year. Domestically, preliminary data show that the economy likely lost 0.2% in December, and the Mexican economy faces a probable credit rating fall in the medium term as a result of political developments, including the expected approval of disputed energy law. Elsewhere, Mexico's trade surplus decreased to USD 0.59 billion in December 2021, down from USD 6.2 billion in the previous year's corresponding month, falling short of market estimates of a USD 1.1 billion trade surplus.


The Chinese Yuan closed 0.69% lower on Thursday. The Yuan held its decline against the greenback on Friday, following its biggest one-day loss in more than seven months, as the U.S. dollar rallied sharply against major peers after the Federal Reserve indicated that it would likely hike interest rates in March and begin reducing its balance sheet soon after. The strong hawkish outlook in the U.S. contrasted with China's policy softening measures as the government tries to cushion a faltering economy. The People's Bank of China recently reduced many major short- and medium-term interest rates, with experts predicting more easing measures in the coming months. Economists from Credit Suisse and Standard Chartered now anticipate a 50 basis point reduction in the reserve requirement ratio in the first half of 2022. In other news, the Shanghai Composite slid 0.97%, while the Shenzhen Component fell 0.53% on Friday, as investors avoided placing large bets ahead of the week-long Lunar New Year break


The Brazilian Real closed 0.41% higher against the greenback on Thursday. The Brazilian Real was trading at its highest level since November 11th, as higher-than-expected inflation figures outweighed a stronger dollar. After stronger-than-expected U.S. Q4 GDP growth confirmed a more hawkish Federal Reserve posture, the dollar index rose near levels last seen in June 2020. Meanwhile, investors analysed Powell's new remarks, which indicated that the central bank will tighten monetary policy faster than expected, with some market participants now betting on five rate hikes this year. Domestically, mid-month consumer pricing data indicated that inflation reached 10.2% year on year, exceeding market expectations but slowing from 10.42% the prior period. Nonetheless, it is significantly above the central bank's target of 3.5%, bolstering the case for the central bank to maintain its policy tightening stance. In other news, Brazilian President Jair Bolsonaro announced on Tuesday that a proposed constitutional amendment being developed by the administration in collaboration with Congress will allow for the lowering of federal and state taxes on fuel, electricity, and cooking gas.


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