Daily Market Pulse

Dollar subdued ahead of Fed’s meeting

USD

Following an impressive surge on Tuesday, the U.S. dollar index lost its momentum early Wednesday ahead of the Fed's meeting. Investors awaited the Federal Reserve's December meeting minutes with bated breath, hoping for indications on the Fed's policy tightening course. Investors are also anticipating a slew of U.S. economic data this week, including the December jobs report on Friday. Fears of a U.S. recession gripped markets at the start of the year, with former New York Fed President William Dudley declaring that a U.S. recession is possible but unlikely to be severe. Furthermore, former Federal Reserve Chair Alan Greenspan stated that a recession is the "most likely conclusion" for the world's largest economy.

EUR

On Tuesday, the Euro shed more than 100 pips and fell to its lowest level since December 13. The Euro clings to moderate recovery gains near early Wednesday albeit  a drop in dollar prices ahead of the Fed meeting. Still, the single currency has challenges ahead, as new data suggest that inflation in France has fallen following Germany's gloomy figures. This may cause the ECB to reassess its future rate hike intentions. In terms of data, the S&P Global Eurozone Composite PMI was revised higher to 49.3 in December 2022, up from an earlier estimate of 48.8, but still indicating a sustained decline in economic activity, which was the weakest since last July.

GBP

Sterling ended the first two trading days of the week in the red. With the U.S. dollar shedding some momentum in the European morning, the pair is clinging to minor rebound gains and has risen 0.65%. Meanwhile, new data reveal that food inflation reached a new high of 13.3% in December, up from 12.4% in November. The BRC blamed the increase in energy and raw material prices on the Ukraine conflict. With the battle running on with no end in sight, food prices are unlikely to fall anytime soon. All indications point to the Bank of England continuing to raise interest rates in early 2023, beginning with the February 2nd meeting.

JPY

The Japanese Yen recovered its losses against the US dollar from yesterday amid speculation that the Bank of Japan might abandon its liberal monetary policy. Meanwhile, Japan's 10-year government bond rate surged to 0.47% in the first days of 2023, approaching 2015 highs and hovering near the upper limit of the Bank of Japan's policy range, as investors bet the central bank will need to shift away from its ultra-loose monetary policy. According to official releases, the Jibun Bank Japan Manufacturing PMI was 48.9 in December 2022, up from 48.8 in the previous month and 49 in November. Factory activity fell for the second month in a row, at the fastest rate since October 2020, due to weak domestic and international demand.

CAD

The Loonie rose 0.90% Wednesday morning after falling 0.72% the day before. The commodity-linked Loonie is benefiting from broad-based dollar depreciation and rising risk sentiment. In today's developments, Canada's 10-year government bond yield rose closer to 3% as investors began rebalancing their portfolios for 2023 to account for slowing growth and a less aggressive posture from the central bank. According to the most recent data, the Canadian economy increased an annualized 2.9% in the third quarter of 2022, exceeding estimates for a small 1.5% increase but remaining the weakest showing since the second quarter of 2021. Analysts predict that growth will slow in the fourth quarter of 2022 and the first half of 2023.

MXN

The Mexican Peso is rising this morning after rising 0.32%,  mirroring increases in most Latin American currencies. The Mexican Peso gained 5.3% against the U.S. dollar in 2022, placing it second among the 31 G-10 and EM currencies tracked by Bloomberg. Meanwhile, Mexico is launching off 2023 with a dollar bond offering, issuing benchmark-sized five- and 12-year bonds that may yield 195bps and 295bps above Treasuries, respectively. The bond sale concluded on Tuesday, making Mexico the first emerging market government to access global debt markets this year.

CNY

Today, the Chinese Yuan gained traction and is up 0.42% against the U.S. dollar. Meanwhile, investors remain wary as the government deals with an increase in Covid cases and a rising death toll in China, while the country's quick reopening is considered a favorable element for its economy in the long run. An improving global risk mood also restrained the Chinese currency from falling further as investors awaited the latest Federal Reserve meeting minutes, which could steer the rate hike outlook.

BRL

The Real opened higher on Wednesday, with investors watching for the new government's announcement of economic policies and their implications for the health of the public accounts. Meanwhile, On Tuesday, the ministry's executive secretary, Gabriel Galpolo, told GloboNews that Haddad should send President Lula a "flight plan" to lower this year's deficit by next week. On the data front, the S&P Global Brazil Services PMI decreased to 51 in December 2022 from 51.6 the previous month, according to data. It was the slowest rate of growth in 19 months, weighed down by increased political instability and the suspension of several businesses during the World Cup.

 

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