Daily Market Pulse

Fed’s Beige Book: economic recovery has been “modest”

5 minute read


The U.S. Dollar Index, the most common indicator to benchmark the performance of the greenback against a basket of major currencies, had a strong start to yesterday’s session, rallying 0.34% but the move was erased, gradually closing virtually unchanged. We have seen a gradual recovery of the greenback in recent sessions as it has been stepping higher despite the latest dovish comments from Fed officials undermining the spike in inflation. Yesterday, the Fed’s Beige Book revealed that the U.S. economy has expanded at a moderate pace but at a faster rate than the previous April release. Inflation remarks showed that selling prices have indeed increased, but somewhat at a slower pace than input costs, which have been affected by supply chain disruptions. The report did not reveal any unknown or unexpected elements, reflected on the overall flat performance of the dollar. Today we expect some data flow from the U.S. with ADP Employment Change and ISM Services PMI being the most relevant releases of the day. 


The EUR suffered some pressure yesterday, falling 0.4% during the European trading session and recovering after the American market opened. On the data front, Eurostat released the Producer Price Index (PPI) figures which exceeded expectations with +1% monthly (expected 0.9%) and 7.6% yearly (expected 7.3%). Christine Lagarde, President of the European Central Bank (ECB) repeated on Wednesday that policy will keep providing support and favourable financing conditions throughout the crisis. 


Fears of a delay in the final re-opening phase of the United Kingdom (U.K.) keeps the reins held tightly on cable due to the recent surge in coronavirus cases. Prime Minister Boris Johnson said that even if a delay can not be ruled out, any adjustments should be a matter of weeks given the fast vaccination rollout and strong inoculation ratios. Solid fundamentals still support the cable which has been trading in a horizontal channel for a number of weeks, close to the three-year highs. Today, the Treasury Committee of the House of Commons will carry on the hearing of the Bank of England (BoE) where Governor Andrew Bailey will summarize the Monetary Policy report and give a speech. Officials from the BoE have suggested that prospects of a recovery remain strong and are supported by recent housing booming data. The market expects Governor Bailey to build on the common narrative central bankers are deploying, but a hawkish declaration from the BoE could spark some volatility in cable. 


The Japanese Yen edged 0.08% lower against the USD and extended further losses against other major currencies. The overall weakness of JPY accentuates as the global economy recovers while Japan struggles with a surge in coronavirus cases. Yesterday, Seiji Adachi, board member from the Bank of Japan (BoJ) said that inflation could reach the 2% target in a post-pandemic environment and that for now there was little the BoJ could do besides “patiently” sustaining its massive stimulus program. 


The Loonie gained a solid 0.27% against the dollar trading closer to the six-year highs registered on Tuesday. The momentum in CAD comes off the back of the short and “easy-going” OPEC+ meeting where members agreed to stick to the original agenda to gradually increase the oil supply as the global economy recovers at a faster pace than anticipated. Market participants are expecting that the Bank of Canada will taper its asset purchase program again next quarter and raise interest rates earlier amid expectations of economic growth, bolstered by a significant increase in oil prices.


The Mexican Peso remained within the two-week horizontal channel against the dollar, testing the upper bound during the European trading session but failing to register any significant moves. The government announced the Mexico-United Kingdom Trade Continuity Agreement (TCA) has come into effect to replace the trade agreement that Mexico has with the European Union (EU) which the U.K. used to fall under before Brexit. The TCA allows reduced tariff trade under very similar conditions to the previous agreement for the next three years.   


The onshore yuan continues to retrace against the greenback driven by the latest adjustment in deposit reserve rates and tension in the South China Sea. Yesterday, Malaysia accused China of breaching its airspace, which according to the Malaysian air force, a group of 16 aircrafts flying in “tactical formation” came within 60 Nautical from the island of Borneo. Attempts to contact the aircrafts were in vain and jet firefighters were deployed to carry on visual identification. The Ministry of Foreign affairs issued a diplomatic protest and summoned the ambassador of the People’s Republic of China to discuss the incident which violated Malaysian sovereignty.  


The Brazilian Real continued to rally, recording 1.6% gains against the greenback, the highest since December 2020. The President, Jair Bolsonaro plans to go ahead with Copa America despite criticism around the pandemic situation in the country. The BRL continues to benefit from capital flows into equity markets which have reported gains for the last eight consecutive weeks registering new record highs due to strong optimism and surge in exports off the back of a spike in FX rates.  


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