Daily Market Pulse

Dollar tries to stabilize ahead of ECB and BOE


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, managed to stage a modest rebound in the late American session on Wednesday, although the Index ended up settling in negative territory, closing 0.35% lower. Following a dramatic three-day loss, the dollar attempted to regain its momentum as market sentiment remained cautious, as evidenced by a drop in U.S. equities ahead of key central bank meetings. The European Central Bank is expected to maintain current policy while acknowledging rising inflation, while the Bank of England is expected to raise interest rates again and imply further withdrawal of economic support. Analysts predicted that hawkish outcomes would put pressure on the greenback, which has been falling since Federal Reserve officials resisted expectations of a 50 basis point rate hike in March. Moving forward, the U.S. economic calendar will feature weekly Initial Jobless Claims, December Factory Orders, and the January ISM Services PMI.


The Euro closed 0.29% higher, climbing to a fresh weekly high before consolidating its gains on Thursday morning. The Euro rose, moving away from 20-month lows, after new data showed that Eurozone inflation continued to rise for the seventh consecutive month, reaching a new record high of 5.1% last month. The surge in inflation is raising expectations that the European Central Bank (ECB) will have to raise borrowing costs sooner than previously anticipated. Although the central bank originally ruled out rate hikes this year, money markets now anticipate a 30 basis point increase by December rather than a 20 basis point increase before the inflation report, with the first 10 basis point boost occurring in July rather than September. All eyes are now focused on the European Central Bank's monetary policy decision for the updates on the central bank's inflation outlook and tightening plans.


The Pound Sterling closed 0.41% higher yesterday before posting small losses on Thursday morning. On Wednesday, the British pound remained firm amid expectations of a rate hike by the Bank of England (BOE) and a weaker dollar. Following a 15bps hike in December, the Bank of England is projected to raise its benchmark interest rate by 25bps to 0.5% in today’s meeting, to combat increasing inflation. It would be the first consecutive hike since 2004, raising borrowing costs to their highest level in two years. The BOE is also anticipated to hint that it will begin unwinding its pandemic stimulus. Meanwhile, the yearly inflation rate in the United Kingdom has reached a 30-year high, yet unemployment remains low, and the impact of the Omicron coronavirus strain appears to be less severe than previously predicted.


The Japanese Yen closed 0.22% higher, although its momentum faded away during the early hours of Thursday. The Japanese Yen fell against the U.S. dollar on Thursday, snapping a four-day rise, as Bank of Japan deputy governor Masazumi Wakatabe said it is early to tighten monetary policy until inflation reaches the bank's target of 2%. He claimed that doing so would jeopardize the economy's recovery from the pandemic. He also recognized that consumer inflation may accelerate to approximately 1% in the coming months and that it may increase faster than predicted as more businesses seek to pass on rising costs to consumers. Furthermore, the Yen fell as the dollar regained its footing following a drop in equity futures and ahead of crucial central bank meetings. 


The Loonie closed 0.14% higher before losing its momentum and heading downwards on Thursday morning. A confluence of factors caused the Loonie to lose its bullish traction on Thursday, snapping a three-day winning streak. Crude oil prices retreated from a new seven-year high reached the previous day, undermining the commodity-linked loonie. The U.S. dollar, on the other hand, made a strong return and reversed some of the overnight losses, underpinned by the dismal U.S. ADP report. This, combined with an increase in U.S. Treasury bond yields and a milder risk tone, provided some support for the greenback against the Loonie. Market players are now anticipating the U.S. economic calendar, particularly the release of the ISM Services PMI later in the early North American session. This, together with U.S. bond yields and overall market risk sentiment, will impact Loonie prices.


The Mexican Peso finished 0.15% lower followed by consolidating its losses this morning. The Mexican currency fell for the first time this week on Wednesday, along with most Latin American currencies. This follows a minor recovery in the U.S. dollar due to cautious market sentiment and sustained yields. Meanwhile, according to board member, Jonathan Heath, Banxico's monetary policies will likely accompany and anticipate Fed actions to prevent capital flows from hampering the slowing of inflation. Furthermore, President Lopez Obrador (AMLO) stated on Wednesday that Mexico is not in recession, highlighting the fact that the economy has expanded compared to last year and that job reports were positive in January. The Mexican Presidency and AMLO forecast the economy to grow 5% from 2022 to 2024. Moving forward, the Mexican Consumer Confidence Index for January, which is predicted to be 45.3, will be featured. Furthermore, the release of data from the U.S. docket will have a significant impact on Peso prices.


The Chinese Yuan remained unchanged on Wednesday amid the Chinese new year holidays. As Chinese financial markets remained closed for the week-long Lunar New Year vacation, the offshore yuan held steady against the U.S. dollar in low-volume trading. The Yuan has gained modestly this week as the dollar has fallen after Federal Reserve officials resisted predictions of a 50 basis point rate hike in March. Meanwhile, the Chinese currency remained under pressure due to widening policy divergence, as impending rate hikes in the U.S. contrasted with China's monetary easing. The People's Bank of China has reduced many major short- and medium-term interest rates, with experts anticipating additional easing measures in the coming months, including a 50 basis point reduction in the reserve requirement ratio.


The Brazilian Real closed flat against the greenback on Wednesday. This comes after, the Central Bank of Brazil unanimously voted to hike the Selic rate by 150 basis points to 10.75%, as expected. It was the eighth consecutive interest rate hike since the Brazil Central Bank began tightening, with policymakers expecting another, but smaller, increase at the next meeting. The committee repeatedly stated that, given the risk-adjusted balance, it is reasonable for the tightening cycle to progress significantly towards the restrictive scenario to cement a disinflationary process and anchor expectations. Meanwhile, the National Congress resumed work this Wednesday after a long end-of-year break, but the carnival is already here. The clash between powers over the rise in the price of fuels is the highlight of the agenda.


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