Daily Market Pulse

Dollar surges following Powell’s hawkish remarks


The U.S. dollar index continued gains on Thursday and is on course to reclaim 20-year highs after the Fed stated that interest rates will be higher than previously anticipated and that it is far too early to discuss a pause in the rate-hike cycle. Markets were taken aback by such a hawkish statement, as they had expected the Fed to announce a shift. At the same time, despite significant sector slowdowns, the U.S. economy continues to demonstrate extraordinary resilience. Inflation remained elevated, and near 40-year highs, GDP rebounded in the third quarter after contracting in the previous two quarters, and employment continues to expand. Traders are now focusing on the nonfarm payrolls report, which is due on Friday.


The Euro fell this morning as investors flocked to the U.S dollar in response to the Federal Reserve's more hawkish-than-expected speech. U.S. officials raised interest rates by 75 basis points on Wednesday, as expected, but cautioned rates might peak higher even if a reduced pace of rises is soon implemented. In other news, the European Central Bank is poised to tighten monetary policy even further in the coming months since inflation has proven to be worse and more persistent than policymakers had anticipated. President Lagarde stated on Tuesday that the bank should continue to raise interest rates, despite the heightened likelihood of a eurozone recession. Recent data reveal that the currency bloc's headline inflation soared to a new record of 10.7% in October, well above the bank's objective of 2%, driven by energy and food costs; nevertheless, the region's GDP growth fell drastically to 0.2% in the July-September period, the slowest pace in six quarters.


The British pound dropped on Thursday following the Bank of England's decision to raise interest rates. During its November meeting, the Bank of England hiked interest rates by 75 basis points to 3%, the largest rate hike since 1989, raising borrowing costs to the highest level since late 2008. Policymakers expressed alarm about persistently rising inflation, which jumped to a 40-year high in September despite a deteriorating economic outlook. Looking ahead, the BOE forecasts that GDP will continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending; while CPI inflation will begin to fall back early next year, before dropping sharply to well below the 2% target in two years.


Today, the Japanese Yen fell against the U.S. dollar. Nonetheless, it outperforms major peers as expectations of a change in Japan's yield curve control policy offset hawkish messaging from the U.S. The Federal Reserve System. While the Fed hiked interest rates by a widely predicted margin of 75 basis points, Fed Chair Jerome Powell warned that rates could peak higher even as a slower pace of hikes could soon be established. Meanwhile, Bank of Japan Governor Haruhiko Kuroda recently hinted at a possible adjustment in the yield curve control policy “if the achievement of our 2% inflation target comes into sight.” Traders also remained cautious as Japanese authorities could again intervene in the currency markets after the finance ministry revealed that it spent about $43 billion between Sept. 29 to Oct. 27 to support its currency.


The Canadian currency fell 0.60% on Wednesday after the Fed raised interest rates by 75 basis points. Although the original statement sounded less hawkish than expected, Jerome Powell's comments subsequently frightened the markets, sending stocks lower and helping the dollar recover some of its losses. Investors are now speculating on the amount of the December rate hike. Meanwhile, the Bank of Canada hiked rates by only 50 basis points on October 26, deviating from the Fed's rate hike plan. In today's session, the Loonie is falling against the dollar as investors become risk-conservative in the aftermath of Powell's hawkish statements. In other news, Canada's trade surplus increased to CAD 1.1 billion in September 2022, up from a downwardly revised surplus of CAD 0.6 billion the previous month and falling short of market estimates of CAD 1.3 billion.


After gaining 0.39% yesterday, the Mexican Peso is losing pace today due to risk aversion in the market. The downturn is mostly driven by the dollar's gain in response to the Fed's hawkish words, which indicated further rate hikes in the future following a 75-bps rate hike yesterday. Meanwhile, recent data show that Mexico's manufacturing growth remains subdued, according to S&P. Global Mexico Manufacturing PMI remained constant in October 2022, at 50.3, the same as in September, indicating continued modest expansion in industrial activity. Furthermore, the Mexican economy grew by 1% in the third quarter, above estimates of a 0.7% increase and marking the country's fourth straight quarter of growth amid increasing inflation and significant rate hikes by the Banxico.


The offshore Yuan fell again vs. the dollar today, lingering near record lows as the monetary policy gap between China and the U.S. expanded. On November 2nd, the Fed hiked interest rates by 75 basis points, as predicted, although Fed Chair Jerome Powell stated that rates could peak higher even if a slower pace of rises is shortly implemented. Meanwhile, the Chinese economic downturn caused by Covid lockdowns, a sagging housing sector, and weakening external demand is pushing the People Bank of China to maintain "normal" monetary policy for the foreseeable future. After an unsubstantiated social media statement earlier this week fueled hopes of a policy shift, Chinese authorities underlined that the government is dedicated to its Covid Zero policy. Furthermore, dismal Chinese manufacturing and services activity figures exacerbated the world's second-largest economy's already bleak outlook.


Yesterday, the Brazilian Real closed flat against the U.S. dollar. The Fed added to the pressure by raising interest rates by 75 basis points, as predicted by the market. In addition, interest rates in the United Kingdom increased. Domestically, attention is still focused on the post-election scenario. Investors continue to speculate on who President-elect Luiz Inácio Lula da Silva should appoint as Minister of Economy. Elsewhere, In October 2022, consumer prices in Sao Paulo increased by 0.45% over the previous month, following a 0.12% increase the previous month. It was the most significant increase in consumer prices since April.


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