Daily Market Pulse

Markets remain calm ahead of FOMC

5 minute read


The U.S. dollar index, a major indicator used to assess the performance of the greenback against a basket of six major currencies remains in a tight range on early Wednesday as investors step to the sidelines ahead of the widely expected U.S. Federal Reserve gathering taking place later today. The market mood remains uncertain while U.S. treasury yields fluctuate around 3% as market participants expect policymakers to announce a 50 bps interest rate hike to tame 8.5% inflation. Additionally, investors will stay tuned to ques from Jerome Powell and his plans for balance sheet reduction to unwind the Pandemic stimulus. Moreover, the economic docket will release ADP employment change, as well as ISM indicators and S&P composites to gauge economic activity ahead of the Federal Market Open Committee. 


The Euro consolidates previous losses against the dollar, remaining relatively unchanged for the second consecutive session, as cautiousness takes over the market ahead of the all-important Federal Market Open Committee in Washington. The European Commission President, Ursula von der Leyen, said early this morning that they will phase out the Russian supply of Crude oil and refined products by the end of the year. The head commissioner added that Sberbank and other major Russian financial institutions will be excluded from the SWIFT network as part of the latest sanction package. The European economic docket will feature March Retail Sales for the bloc, as well as S&P composite readings and we will keep an eye open to any relevant outcomes from the Non-monetary policy ECB meeting taking place today. 


The Pound Sterling remains under considerable pressure amid expectations of a more aggressive monetary policy from the Federal Reserve than from the Bank of England, which is set to gather this week as well. As both central bank meetings approach, investors remain cautious avoiding placing big bets ahead of the monetary statement from U.S. policymakers, as cable remains relatively unchanged during the early hours of the day. However, Consumer Credit readings for march fell less than previously anticipated, from GBP 1.56 billion down to GBP 1.30 Billion, while Mortgage approvals missed expectations dropping from 70.97k to 70.69k reflecting a struggling commercial banking sector. Tomorrow, investors will stay tuned to BoE monetary policy meeting where policymakers are expected to announce a 25 bps hike. 


The Japanese Yen trades within a tight range amid a broader uncertain mood in the global market as participants prepare for the Fed meeting later today. Additionally, Japanese liquidity remains thin, as banks stay closed for the third consecutive session as the nation celebrates Children’s Day and banks will stay close again. However, later on in the week, investors will take a fresh look at Tokyo Consumer Price Index which is likely to remain low as efforts from the Central bank to incentivize inflation fail to provide results. Monetary policy remains dovish in the Japanese economy, in contrast to Fed officials who are expected to increase their benchmark rate by 50 bps this afternoon.  


Yesterday, the Canadian dollar gained 0.30% for the first day after three consecutive sessions, trading in the negative territory. In general, the CAD climbed alongside most of the G10 peers against the U.S. dollar, as market players were cautious ahead of the Fed´s meeting. For today, investors will wait until the U.S. policy event is out of the way, before moving their capital. Looking ahead, the Canadian labor market data is due on Friday and it is expected to show that the situation in the labor market is tighter than expected. This is likely to trigger the Bank of Canada to accelerate its rate hikes over the coming months, which could provide some extra support to the CAD.      


The Mexican peso recovered some lost territory on Tuesday in tandem with other emerging market currencies. The Peso strengthened 0.88%, amid declines in the Dollar and U.S. Treasury yields ahead of the Fed meeting. Furthermore, some market participants expect that the Fed's expected monetary tightening would pave the way for more hikes in the key rate of the Bank of Mexico (Banxico), which has already raised it by 250 basis points since June. On that note, the Mexican policy rate is seen finishing 2022 above 9.5%, as the deposit rate curve points out to 310bps of rate hikes by December, with six regular Banxico meetings scheduled.


The Chinese markets are shut for public holidays.


Yesterday, the Brazilian Real closed 1.55% up against the greenback after the intervention of the local authority in the FX market, bringing more liquidity and increasing demand for the Real. Looking ahead, a big day for the currency today. Brazil Central bank’s monetary policy committee is expected to raise the Selic benchmark interest rate by 100bps, from 11.75% to 12.75%. Although some BCB members are suggesting that the bank is close to ending the tightening cycle, the current and expected inflation is still far from the inflation target for the year. Analysts will seek evidence if the Brazilian Central Bank will prioritize keeping the Selic at a level around 13% for longer instead of raising the Selic to even tighter levels.


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