Daily Market Pulse

The lasting effects of the Fed’s decision

6 minute read


The Dollar was steady (+0.01%) against a broad basket of major currencies on Thursday, amid the lasting effects of the Fed’s decision the day before.  The U.S. also released its GDP in Q1, which came in at +6.4% versus 6.1% expected. The dovish policy stance appears to be the main driver for the bearish dollar view at present and the reason that led the USD to currently trade at its lowest level since February. However, in stark contrast, the ultra-low accommodative policy, along with President Biden’s plans to flow trillions more into the U.S economy would stimulate (once again) discussions around higher inflation and, perhaps, higher yields in the upcoming months. Thus, this combination would certainly support the USD against its major rivals. On the economic front, personal income and spending for March are set to be released later today.


Yesterday, the single currency lost some brightness after German unemployment rose unexpectedly in April and companies put more staff on shorter shifts in subsidized job protection schemes. As a result, the Euro closed steady amid a USD weakness trend in the global markets. Furthermore, weighing on the EUR, the eurozone released its money supply data for March, which showed that growth slowed to 10.1% year-over-year, from 12.2% in February. The reading suggests that investors and businesses are still concerned about the prospects of the eurozone economy, thus holding new investments and projects. Looking ahead, official authorities will release the Q1 GDP data that is widely expected to show another economic downturn over the first three months of the year as the Covid-19 pandemic has prompted governments to renew lockdowns across the bloc. 


Following the Dollar weakness, the British Pound rose 0.09% and notched its fifth straight session of gains on Thursday. In general, the GBP has appreciated well over 1% in April, as activity across Britain is beginning to pick up, backed by a rapid vaccination rollout and economy reopening.  Looking forward, the near-term event calendar could set the tone for the currency in May and bring with it a dose of volatility. Next week will see a major Bank of England (BoE) decision as well as the Scottish election that might result in a majority for pro-independence parties.


Although a bearish USD sentiment is all around, the Japanese yen is still bucking the trend. Yesterday, the JPY slid 0.32% against the greenback, extending losses as the recovery of U.S. government bond yields takes shape. On that note, the Benchmark 10-year Treasury yield jumped to a two-week high, touching 1.67% in the aftermath of the US GDP release. Looking ahead, investors will digest the Manufacturing PMI, which was released early today while waiting for April’s household confidence figures. The PMI release is set to give support to the JPY as it pointed to a sustained expansion in the Japanese manufacturing sector at the start of the second quarter of 2021. Firms reported the quickest rates of growth in both production and new orders since early-2018. Overall, the headline Manufacturing PMI was pushed to the highest level for three years.   


The Loonie continued to climb 0.32% higher on Thursday on the back of buoyant oil prices and evidence of a consumer-led recovery in the country. The West Texas Intermediate oil rose to $65.01/barrel (+1.8%), increasing by 33% since the end of 2020. The oil price action is supported by expectations that the U.S. fiscal stimulus will drive a global economic boom, which will increase oil demand. The positive progress of the vaccine implementation in developed economies also collaborates to confirm this outlook. Looking ahead, a raft of economic data is due out later today, including GDP for February, Budge Balance, as well as industrial input costs for March.


The Mexican peso led losses across Latin America’s major currencies, after inching 0.79% down and giving back its previous gains from the day before. The MXN’s drop came about despite expectations of improving oil demand, which pushed oil prices on Thursday. In fact, U.S. yields jumped to a 2-week high yesterday, making the U.S. bond market more attractive to foreign investors, which seems to be the case here. Looking forward, all eyes will be on Q1 GDP figures later today, which will illustrate the impact of the Covid-19 pandemic and energy shortages in the economy throughout February.


Reflecting the upbeat PMI figures, the Chinese yuan closed 0.10% up against the U.S. dollar, registering its fourth straight session in positive territory. The Manufacturing PMI rose from an 11-month low of 50.6 in March to 51.9 in April, which signaled the strongest improvement in the health of the sector since December 2020, albeit one that was modest overall. The report also highlighted that employment, as well as companies, recovered to show growth amid a rise in input costs. Looking ahead, China’s antitrust crackdown dominates the domestic news, as Chinese regulators impose wide-ranging restrictions on the financial divisions of 13 companies, in a broadening effort to rein in the giants of the tech industry.


Yesterday, the Brazilian Real closed almost flat (+0.09%) against the greenback. In general, the Brazilian currency has been trading roughly on the 200-day moving average in the last five sessions, which seems to be now an important support level. The Fed’s decision on Wednesday, to keep monetary stimulus unchanged worked like a pendulum, exacerbating the recovery movement of the BRL rate. The weakest levels notched early in March may not be seen again in the short-medium term, as the Brazilian Federal Budget that was the main impasse came to an end, in fact, an outcome that pleased the market. Now, with the Fed's effect dissipating in the next few sessions, the factors that are at play in determining the exchange rate, such as Selic, current account, and pandemic will have greater influence. Interest rates and current accounts act towards a recovery of the BRL. The pandemic, on the other hand, continues to weigh on the BRL.


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