Daily Market Pulse

Fed on the spotlight


The U.S. dollar index, a coefficient used to value the greenback against a basket of six major currencies, edged marginally higher, recording 0.17% gains recovering losses from the start of the week. However, ahead of today’s Fed monetary policy meeting, the U.S. treasuries remained steady above 1.5% which underpinned the greenback to find some demand. Market participants will stay tuned also to ISM services PMI reading from the U.S. which will be looked upon for fresh impetus before they announce their interest rate decision and release the Monetary Policy Statement. The Fed is widely expected to announce the withdrawal of USD 15 billion in monthly asset purchases while keeping the policy rate unchanged. Market participants will keep a close eye on Powell’s language regarding the rating outlook and expectations looking for hints as to when these rate decisions could happen. The market mood remains upbeat, with all three major equity indexes in the U.S. hitting new all-time highs on Tuesday and sustaining momentum.   


The common currency failed to sustain its Monday rebound enduring pressure during yesterday’s trading session retracing 0.22% against the dollar. Downbeat prints of October’s final Manufacturing PMI for Germany, France, and the Eurozone as a whole dragged the regional currency down during yesterday's trading session and the dollar consolidated ahead of Fed’s monetary policy meeting. However, anxiety amounts also to the European side as President Christine Lagarde is set to speak during the course of the day. The EUR remains fragile, as U.S. policymakers and monetary policy divergence are expected to sustain pressure on the EUR for the coming months. It should be noted that inflationary pressures remain present in the bloc and hence Lagarde, President of the European Central Bank has fewer options than to accept the wait-and-see situation, which in turn allows the common currency to take clues from the Fed’s verdict. 


The British Pound extended losses during yesterday's trading session as the “Old Lady” credibility is at stake on the upcoming interest rate decision and its imminent rate hike. Additionally, the U.K. Prime Minister Boris Johnson removed some pressure from the quote after providing constructive comments which suggested an easing Brexit tussle with France. The PM downplayed the relevance of a rift between the U.K. and France over post-Brexit fishing licenses, calling the issue “vanishingly unimportant” when compared to efforts to limit global warming amid the COP26 meeting. The U.K Brexit Minister David Frost accepted the French invitation to visit Paris for further Brexit talks, especially after France warned to block U.K. vessels. Moreover, the arguments for and against the Bank of England’s interest rate hike are finely balanced and uncertainty floods the British market. Brexit hassle, Covid cases rising again, inflationary pressures, and BoEs credibility will be strong drivers for policymakers to make a decision on Thursday. 


The Japanese Yen remained quiet during yesterday's trading session as banks remained closed due to Culture Day in Japan. Moreover, the re-election of Japan’s Fumio Kishida as the Prime Minister of Japan reduces challenges for the Bank of Japan (BoJ), and hence USDJPY conveyed fears of any reduction in easing monetary policy amid the recently firmer price pressure in the economy. However, market participants are aware that USDJPY remains sensitive to the outcome of U.S. officials outcome later today, although upcoming Jibun Bank Services PMI and Overall Household Spending readings might bring market impetus.


The Canadian Dollar remained on the back foot against the greenback as crude oil prices slipped amid crude oil inventories and a cautious mood ahead of major central bank events. The loonie weakness is associated with the recent sell-off in the West Texas Intermediate after crude oil inventories rose by 3.6 million barrels on its latest weekly report. The WTI fell 1.23% during the early hours of today's trading session as the barrel changed hands at USD 82 removing support from commodities link currency. The sentiment in the oil market will play a crucial role in the loonie’s performance, as investors eagerly await the OPEC+ meeting on Thursday. 


The Mexican Peso snapped back from its six consecutive session recording losses, retracing 1.55% off its three-week lows against the greenback. The peso is being affected by increasing concerns about the health of the Mexican economy amid symptoms of stagflation following the disappointing growth readings and sustained inflation reports which have triggered a tightening cycle from policymakers. The economic outlook weighs on MXN compromising its performance against the greenback, failing to benefit from risk flow drivers and crude oil prices. Moreover, Bnaxioc revised down their forecast for Mexico’s GDP growth in 2021, from 6.15% to 6.00%, after the economy contracted 0.1% in Q2. 


The Chinese Yuan shows resilience amid a broader cautiousness ahead of the all-important Fed interest rate decision which is expected to see the U.S. central bank start rolling back its massive stimulus programme. However, investors are almost certain of tapering. Increased expectations of high inflation might force policymakers to raise rates sooner than projected and any hints around timing would be appreciated by market participants. However, as conditions in China also start to worry amid Evergande contagion risks, investors believe that the People’s Bank of China will come under pressure to increase liquidity injections to fill the funding gap. 


The Brazilian Real remained relatively unchanged flirting with the lowest levels in April this year. The Real remains weak against the greenback amid sustained inflationary pressures and Central Bankers hiking interest rates amid considerable fiscal and political risks. The spike in energy prices globally and the broader inflation outlook have ignited strikes in Brazil over fuel costs in the country.  The strike came amid mounting anger in the transport sector which triggered a rift between Jair Bolsonaro and state-owned company Petrobras. The oil company assured that it is not intending to raise prices any further, although President Jair Bolsonaro said that he knew “unofficially” that further price increases were in the pipeline. 


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