The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.68% lower on Thursday and continues to extend losses this morning. The dollar index fell for the fifth consecutive day and was on course for its worst-performing week since March 2020, as traders reviewed the prospects for monetary policy following a hawkish shift in gears from major central banks. The Bank of England boosted interest rates by 25 basis points, despite the fact that over half of its members requested a larger 50 basis point increase to manage inflation. Additionally, the European Central Bank held interest rates steady, although ECB President Christine Lagarde refused to rule out a rate hike this year, citing rising inflationary pressures. Furthermore, investors are now anticipating the highly anticipated Non-Farm Payroll (NFP) report, which is due later today. Market consensus predicts that nonfarm payrolls will increase by 150K in January 2022, the lowest reading since December 2020, when the omicron coronavirus strain kept many Americans out of work owing to illness or family care. In addition, the Unemployment rate and Labor force participation rate will also be featured in today’s economic docket.
The Euro closed 1.20% higher against the greenback, moving away from the 20 month low touched earlier this week before consolidating its gains on Friday morning. The Euro gained after statements from European Central Bank (ECB) policymakers signaled a hawkish approach in response to the ECB’s unanimous worry about increasing inflation. During the ECB press conference, President Lagarde ruled out keeping rates steady this year, saying the bank would carefully assess conditions and there would be "no commitments without conditions." Money markets now expect the ECB to hike rates by 40 basis points this year, up from 30 basis points before the February monetary policy meeting. In other news, the IHS Markit Eurozone Construction PMI increased to 56.6 in January 2022 from 52.9 in December, indicating the largest gain in the construction industry since January 2018, owing mostly to rising new order growth. House construction increased at the fourth-fastest rate in the survey's history, leading to the gains. Moving ofrwrad, Eurozone Retail Sales for December will be featured, which is expected at 5.1% annually.
The Pound Sterling closed 0.15% higher yesterday before losing its momentum this morning. The British pound climbed for the sixth session in a row to a two-week high of $1.36 on Thursday, as investors reacted to the Bank of England's projected 25 basis point rate hike amid the highest inflation rate in three decades. Simultaneously, officials announced the start of tapering the central bank's £875 billion QE programme by immediately ceasing to reinvest the revenues of expired gilts, as well as intentions to sell off the whole book of corporate bonds by the end of 2023. Four officials allegedly voted for a steeper rate hike of 50 basis points to 0.75%, which has not occurred since the bank's independence in 1997. Elsewhere, the FTSE 100 rose nearly 1% on Friday, rebounding from a 0.7% drop the previous session and adopting global bullish cues after strong earnings from U.S. Amazon raised investors' morale and served to ease fears about the tech sector's health.
The Japanese Yen closed 0.45% higher and continued its downward momentum during the early hours of Friday. This comes after Bank of Japan deputy governor Masazumi Wakatabe stated on Thursday that tightening monetary policy is premature until inflation reaches the bank's target of 2%. He claimed that doing so would jeopardize the economy's recovery from the pandemic. The spokesman also recognized that consumer inflation may accelerate to approximately 1% in the coming months and that it may increase faster than predicted as more businesses seek to pass on rising costs to consumers. Meanwhile, the Japanese Yen's losses were limited by the dollar's relative weakness, as traders reviewed the global outlook for monetary policy and pared-back excessively bullish bets on the greenback. Elsewhere, on Friday, the Nikkei 225 Index jumped 0.73%, while the Topix index rose 0.55%, both indices recovering from early losses as investors' concerns were soothed by blowout profits from many U.S. technology giants.
The Loonie closed 0.07% lower before losing its momentum further and heading downwards on Friday morning. The Loonie saw some selling for the second day in a row this morning and is now trading near the weekly low. A subsequent rise in U.S. Treasury bond yields, combined with a cautious market attitude, weighed on the commodity-linked Loonie. Furthermore, the selling tone might be attributed to some repositioning trades ahead of the major monthly jobs report from the U.S. and Canada, which is coming later during the early North American session. Meanwhile, the widespread bullish attitude surrounding crude oil prices may support the commodity-linked loonie, limiting its downside losses. Worries about constrained global supply chains and geopolitical concerns continued to underpin crude oil prices. Going forward, the market will be focused on the U.S. NFP data, which is likely to reveal that the economy added 150K jobs in January, up from 199K in the previous month. Traders will also be influenced by Canadian labour market statistics, which will be revealed today
The Mexican Peso recovered Wednesday’s losses after advancing 0.12% against the USD dollar on Thursday. However, its momentum was short-lived amid a broader risk sentiment in global markets as key central banks shift gears in the tightening cycle. Economists anticipate that the MXN will steadily depreciate as a result of Fed policy and local initiatives. Market players believe that effective monetary policy tightening in the U.S. will further strengthen the greenback against the Peso. On the contrary, a moderate rate of depreciation will be noticed if Mexico continues to raise its benchmark rate to offset inflation expectations, which may partially balance the causes that push the MXN to weaker levels. In other news, Mexico's consumer confidence indicator fell to 43.4 in January 2022 from a downwardly revised 44.4 the previous month, as consumer sentiment dropped across all survey themes. Sentiment for the country's current economic state and peoples' financial situation has deteriorated compared to last year.
The Chinese Yuan remained unchanged on Thursday amid the Chinese new year holidays. As Chinese financial markets remained closed for the week-long Lunar New Year vacation, the Yuan held steady against the U.S. dollar in low-volume trading. The Yuan has risen somewhat this week as the dollar fell after Federal Reserve officials shutdown rumors of a 50 basis point rate hike in March. Meanwhile, the Chinese currency remained under pressure due to widening policy divergence, as impending rate hikes in the U.S. contrasted with China's monetary easing. The People's Bank of China has reduced many major short and medium-term interest rates, with experts anticipating additional easing measures in the coming months, including a 50 basis point reduction in the reserve requirement ratio.
The Brazilian Real closed 0.25% lower against the greenback on Thursday. This comes after investors used the more risky external scenario as a rationale to buy back the U.S. currency after it hit a four-month low. Meanwhile, the market examined the Brazil Central Bank's signal issued the day before about slowing the pace of interest rate hikes, which might lead to the tightening cycle concluding at a lower level than projected by analysts, limiting the potential return offered by the Brazilian currency. Furthermore, with the Selic rate increased to 10.25% per year, the country's basic interest rate returned to double-digit levels for the first time in four and a half years. Higher interest rates in Brazil are largely regarded as beneficial to the Brazilian Real, as they increase the profitability of the domestic fixed income market and tend to promote the flow of foreign money into the nation.