Daily Market Pulse

Dollar rises after Powell’s rate hike decision

7 minute read


By the end of Wednesday, financial markets had seemed to shrug off concerns, at least for the time being. The greenback's demand has waned and it finished marginally down before rebounding slightly this morning. In yesterday's testimony, Jerome Powell hinted at a 25 basis point rate hike in March, which aided Wall Street's recovery as market participants were expecting a 50 basis point hike. He also indicated that if pricing pressures do not begin to lessen, the central bank may have to take stronger action. This year, the bond market anticipates five quarter-point changes. In other news, stocks retraced their early gains on Thursday. The S&P 500 futures declined 0.1%. The Nasdaq 100 futures slid 0.4%. The Ukraine crisis has upended commodity markets ranging from metals to oil and gas, as major corporations depart from Russia. Moving forward, Nonfarm's productivity for Q4 2021, which is predicted to be 6.7%, will be featured during the North American session.


The Euro closed 0.05% lower on Wednesday and appears to be heading downwards modestly during this morning. This comes as traders examine the dread of the Ukraine-Russia situation and the pressures of high inflation in the Eurozone. Furthermore, the Ukraine situation heightened the energy shock as European natural gas prices reached new highs and threatened to rise even further. Meanwhile, the Eurozone's annual inflation rate increased to a new record high of 5.8% in February 2022, up from 5.1% in January and exceeding market predictions of 5.4%.  The inflation rate is almost three times above the ECB's target of 2%. Energy continues to be the most expensive, followed by food and non-energy industrial items. Furthermore, the IHS Markit Eurozone Composite PMI was revised lower to 55.5 in February 2022 from an original estimate of 55.8 but remained higher than January's 11-month low of 52.3. In other news, markets remained subdued despite the energy crisis, with the Stoxx Europe 600 falling 0.1% for the day. Moving forward, ECB monetary policy accounts and the unemployment rate for January will be featured today. 


The Pound Sterling closed at 0.61% higher yesterday, although it reversed some of its losses on Thursday morning. This comes after the U.S. dollar fell yesterday as investors temporarily dismissed concerns about geopolitical risk. Meanwhile, two Bank of England policymakers cautioned that the consequences of the Ukraine strike will destabilize the UK economy which had begun to recover from the coronavirus pandemic. Furthermore, the IHS Markit/CIPS UK Composite PMI was revised lower to 59.9 in February 2022, from a preliminary estimate of 60.2, but it was still significantly above the previous month's final 54.2. The most recent reading indicated the fastest rate of private-sector increase in eight months as the Omicron wave of the COVID-19 pandemic eased, allowing for stronger growth. In other news, the FTSE 100 retraced earlier gains to trade just below the flatline on Thursday, after rising by 1.4% the day before.


The Japanese Yen closed 0.52% lower in the previous session against the greenback. The Yen weakened against the U.S. dollar on Thursday, continuing to drop from the previous session as a strong dollar and stronger risk appetite weighed on the safe currency. Meanwhile, Japan's core inflation rate fell to 0.2% in January, missing expectations and maintaining considerably below the central bank's target. The Bank of Japan has consistently stated that it will maintain ultra-easy monetary policies in order to help economic recovery and meet the 2% inflation target, emphasizing one of the most dovish attitudes among major central banks. Junko Nakagawa, a member of the BOJ's board of directors, also stated on Thursday that the Ukraine situation could harm Japan's economy by driving up fuel and commodity costs, indicating the need to sustain significant support.


The Loonie closed 0.88% higher in the previous session before extending its gains modestly this morning. The Canadian dollar rose to its highest level in five weeks against the U.S. dollar on Wednesday, as the Bank of Canada began its rate-hiking cycle to bring inflation down from a three-decade high. The central bank raised its overnight rate target by 25 basis points to 0.5%, the first increase since October 2018, and stated that it will use its monetary policy tools to bring inflation to the 2% target. Furthermore, rising metal and crude oil prices in the aftermath of the continuing Russia-Ukraine crisis fuelled demand for the commodity-sensitive currency. In other news, Canadian stocks gained on Wednesday, with the benchmark S&P/TSX Composite closing above 21,280 for the first time in two weeks as heavyweight energy sectors found support in rising oil prices. On the heels of the ongoing Russia-Ukraine war, WTI crude surpassed $112 per barrel for the first time since 2011.


The Mexican Peso closed 0.18% in the last session before losing its momentum this morning. This is because traders kept aside their worry of geopolitical risks, for the time being, easing safe-haven bids temporarily. Meanwhile, Mexico’s central bank cut its growth forecast by almost a full percentage point for this year, saying that the Covid-19 pandemic and geopolitical conflicts have deteriorated the economic outlook for the country. Banxico, as the central bank is known, expects GDP to grow by 2.4% this year, down from 3.2% in its previous forecast three months ago. According to the bank's quarterly inflation report released Wednesday, it is predicted to reach 2.9% in 2023.


The Chinese Yuan closed 0.12% lower in the previous session against the greenback. On Thursday, the Yuan hovered above 4-year highs while its value against key trading partners remained near a 12-year high, reflecting a strong loss in the Russian ruble. Large onshore company holdings of foreign currency receipts as a result of a trade surplus position in recent years have also made the yuan largely resilient to external risk aversion. In other news, the Caixin China General Services PMI dipped to 50.4 in February 2022 from 51.4 in January, the lowest value in the current six-month sequence of service activity increase. The slowdown mirrored recent COVID-19 outbreaks and virus-control efforts with output increasing modestly while new orders declined for the first time in six months.


During the holiday tour, the Real proved to be even more resilient to geopolitical turmoil, ending this Wednesday's session with strong gains against the Dollar. The Brazilian Real closed 0.53% higher against the greenback in the previous session. Meanwhile, the growing inflow of foreign capital into the Brazilian capital market continues acting as a backdrop, however the rally in commodities, which make up a good part of the country's exports, also lends important support to the exchange rate. Also, it is worth mentioning that the rise in commodities, especially in Crude oil which already trades near  $117/barrel, will continue to add an undesired inflationary effect to the Brazilian economy. This will cause the Central Bank to reassess its monetary tightening cycle in order to contain a further escalation of inflation. Once again we will have a dispute between GDP, Inflation, and Exchange Rate!


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