Daily Market Pulse

The dollar drops ahead of Fed meeting

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.08% higher before losing its momentum on Wednesday morning. The greenback gained ground versus its peers in the early part of Tuesday's trading day, but lost steam in the late American session, dragging the U.S. dollar down from a two-week high. The greenback is following the minor pullback of U.S. treasury rates, which are now hovering around 1.65%, six-week highs, after hitting a multi-day high of 1.7% the day before. In addition, the currency is being weighed down by mixed hints about the Fed's next move, as well as the Omicron variant. Meanwhile, the ISM Manufacturing PMI fell to 58.7 in December, vs a prediction of 60.0, putting more pressure on the dollar. Coming up, market participants are waiting for the minutes of the FOMC (Federal Open Market Committee) meeting to see what the Fed has to say about interest rate rises. Traders in Money markets have priced in an expected liftoff by May and two more interest rate rises by the end of 2022.


The Euro closed 0.09% lower against the U.S. followed by recovering its momentum modestly on Wednesday morning. This is the second straight day of the Euro closing in negative territory. A difference in Treasury bond rates between the U.S. and Germany combined with chatter about the South African covid variant, Omicron, as well as the U.S. Federal Reserve's (Fed) upcoming movements, refreshed the fortnight low on the previous day. Meanwhile, U.S. Treasury rates are struggling to prolong their recent rally, after hitting a six-week high on Tuesday. German Bund yields, on the other hand, fell from a two-month high the day before. Looking ahead, traders will keep an eye on the U.S. Fed's meeting and Eurozone Markit service PMI to drive Euro prices further.  


The Sterling closed 0.37% higher, erasing its previous session losses and continues to edge higher on Wednesday’s morning. The British pound continued positive traction on Wednesday, amid subdued dollar prices. Falling U.S. Treasury bond rates were a crucial factor in keeping US dollar bulls on the defensive throughout the first half of the trading day, favouring the pound. The British pound was further bolstered by expectations that the Omicron epidemic would not disrupt the UK economy, as well as increased odds on the Bank of England (BoE) tightening monetary policy further. Elsewhere, The 10-year UK government bond yield rose over 1% in early January, reaching its highest level since November 3rd, as the new Covid version has no additional restrictions and the BoE prepares for four rate rises this year. Moving on, traders will see wider market sentiments and U.S. data release to direct Sterling prices. 


The Japanese Yen closed 0.72% lower, although regained momentum when entering Wednesday’s European trading session. The Yen saw modest purchasing on Wednesday, moving away from a five-year low reached the day before, owing to a milder risk tone and subdued dollar pricing. Furthermore, there was a drop in trading momentum in the equities markets, which drew some flows to the safe-haven Japanese Yen. Meanwhile, the upside is constrained due to the recent widening of the U.S.-Japanese bond yield difference. In other news, although the Federal Reserve has shown a willingness to tighten monetary policy this year, the Bank of Japan is largely anticipated to keep its ultra-easy monetary policy for the foreseeable future. Looking forward, the attention will be on the publication of the FOMC monetary policy meeting minutes on Wednesday, which is scheduled for later in the U.S. session.


The Loonie closed 0.28% higher against the greenback before losing its ground softly during Wednesday’s European trading session. The Canadian dollar was trading close to a 7-week high set on December 31st, owing to rising oil prices and bond rates. Crude oil traded at $77 per barrel after OPEC+ decided to keep increasing production at a steady pace. In addition, Canadian bonds rose beyond 1.6%, following the rise in U.S. Treasury yields. Meanwhile, a rise in traders' risk appetite aided the Canadian dollar's survival. Furthermore, the low dollar prices before the Fed meeting acted as a tailwind for the Loonie. Elsewhere, On Toronto's first trading day of the year, the S&P/TSX Composite Index rose 0.1%, as investors' confidence about global economic recovery grew. On the business front, energy stocks gained 3.7% due to rising oil prices, while financials gained 2.4% due to expectations of higher bond yields. Looking ahead, traders will see U.S. data releases, Fed’s meeting and wider market sentiments to move Loonie prices further. 


The Mexican peso finished marginally higher against the U.S. dollar and continued its uptrend modestly during the European trading session. The U.S. dollar fell in value versus the Mexican peso. Because the Central Bank of Mexico just hiked interest rates, economists anticipate that the Peso will rise versus the U.S. dollar, amid the fact that the Federal Reserve is considering reducing its bond-buying programme. Meanwhile, the IHS Markit Mexico Manufacturing PMI remained steady in December 2021 at 49.4, indicating a minor worsening in the sector's health. Furthermore, Mexico's seasonally adjusted manufacturing confidence index increased to 52.7 in December 2021 from 52.6 the previous month, achieving its highest level since May of 2019. Manufacturers' present views on the company's status (55.4 vs 54.7 in November) and investment (39.6 vs 39.2) were more positive.


The Chinese Yuan closed marginally higher before cooling down on Wednesday’s morning. The offshore yuan remained stable against the US dollar this morning, as some investors were concerned that the Federal Reserve will raise interest rates sooner than expected. Meanwhile, this week, the yield difference between Chinese and US 10-year government bonds dropped to its lowest level since mid-2019, as US Treasury rates rose, boosting the prospect of capital outflows and putting pressure on the Yuan. The People's Bank of China (PBoC) is also largely anticipated to maintain monetary easing in order to cushion an economic downturn. Furthermore, market concerns about Beijing's ability to limit the yuan's 2021 gains have persisted, with the PBoC consistently setting a weaker-than-expected yuan fixing since mid-November. Analysts believe that trade and interest rate differentials will continue to be important drivers of the yuan in the future.


The Brazilian Real closed 0.26% lower against the greenback on Tuesday. The Brazilian Real has remained close to an eight-month low recorded on December 21st, as the currency has remained weak amid successively unfavourable estimates for economic growth in 2022. Furthermore, as the 2022 general elections near, rising political uncertainty has driven investors away from the real. Polls suggest that the left-wing PT is increasingly likely to win, while budgetary worries have grown as a result of Bolsonaro's populist tactics. Meanwhile, rumours that President Jair Bolsonaro was hospitalized over the weekend for an intestinal obstruction added to market instability. The far-right president intends to seek re-election in October. Elsewhere, The main Sao Paulo stock index, the Bovespa, fell 0.4%  on Tuesday, extending losses for a second straight session to the lowest level since December 1st, and contrasted with a global uptick in sentiment around the Omicron variant.


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