Daily Market Pulse

Dollar regains its ground


The U.S. dollar maintains its lead over its major rivals early Thursday, as investors appear to be on the sidelines ahead of significant macroeconomic data releases. The hawkish tone in the minutes of the Federal Reserve's December meeting also helps the currency, with the benchmark 10-year U.S. Treasury bond yield returning above 3.7% after a two-day drop. On Wednesday, the risk-averse market climate made it difficult for the U.S. dollar to find demand. Meanwhile, the FOMC stated in the minutes of its December meeting that most participants believed that "much more evidence" of improvement would be required to establish that inflation is on the decline. It also cautioned investors that policymakers want to ensure that markets do not interpret the slower pace of rate hikes as a signal of a policy shift.


On Wednesday, the Euro broke a two-day losing skid and gained 0.53% as market sentiment improved. In the European morning, the common currency moves in a narrow channel. It's worth mentioning that Euro Stoxx 50 Futures are trading flat on the day, confirming the market's cautious attitude. Meanwhile, a spate of economic data indicating that European inflationary pressures have finally peaked has worked as a drag on the Euro, causing it to fall from its weekly high yesterday. Still, the Euro is close to its highest level since June, as the European Central Bank is expected to raise interest rates further to combat inflation, which remains well above the central bank's 2% objective despite early indications of softening.


Sterling gained about 100 pips on Wednesday but struggled to maintain its upward momentum this morning in the aftermath of the FOMC's hawkish meeting. Another factor weighing on the Pound is the Bank of England's less aggressive stance. While Fed governors continue to indicate higher interest rates for a longer period of time, the Bank of England has hinted that its tightening path may soon come to an end, as inflation has peaked and a recession in the British economy is imminent. In other news, Prime Minister Rishi Sunak pledged in his first big speech of 2023 to lower inflation, strengthen the economy, and reduce the nation's debt. He also intended to announce minimum strike laws later today.


The Japanese Yen has regained traction after falling 1.21% yesterday on improved risk movements. Following the FOMC meeting, where the Fed stated to maintain its aggressive posture for the foreseeable future, market sentiment became apprehensive. This aided safe haven Yen in recouping its losses and moving north. Meanwhile, new data reveal that investors digested consumer confidence data in Japan, which improved in December, despite rising prices and economic worries. In other news, Japan's 10-year government bond yield increased to 0.47% in the first days of 2023, approaching 2015 highs and hanging near the upper limit of the Bank of Japan's policy range, as investors gambled the central bank would need to shift away from its ultra-loose monetary policy.


The Loonie is down 0.23% against the dollar today after rising more than 1.4% yesterday. With the release of the December meeting minutes yesterday, investors assessed the Federal Reserve's policy outlook. The U.S. central bank stressed the importance of continuing to boost borrowing costs in order to control inflation, warning investors against a dovish shift anytime soon. This effectively capped Loonie's gains. Meanwhile, WTI oil futures gained more than 2% to approximately $74.5 per barrel on Thursday, as the closure of a U.S. gasoline pipeline prompted investors to open new positions following a big meltdown this week that dropped the commodity as low as $72.7 per barrel. This could offer Loonie a boost during the day.


The Mexican Peso nudged lower today; still, the currency is trading near its highest level since February 2020, as an aggressive tightening from the central bank continued to lend optimism to bulls. In December, the Bank of Mexico increased its benchmark interest rate by 50 basis points to a record 10.5%, adding to the 675 basis point hikes witnessed since the tightening cycle began in June 2021. One of the best-performing emerging market currencies in 2022 was the Mexican Peso, which had its highest annual gain since 2017.


As investors shrugged off overly hawkish U.S. Federal Reserve minutes, the Chinese Yuan appreciated by 0.23% against the dollar on the day. U.S. policymakers stressed the need to rein in inflation without significantly hurting the economy. In the meantime, markets responded to reports that China's services and composite PMIs contracted for a fourth consecutive month in December due to problems caused by the Covid. In December 2022, the Caixin China General Composite PMI increased from November's six-month low of 47.0 to a reading of 48.3. An improvement in the sector's drop was indicated by a rise in the Caixin China General Services PMI to 48.0 in December 2022 from the six-month low of 46.7 in November.


Thursday sees Real trading with fresh gains as investors are excited ahead of  the unveiling of the new government's economic plans. The markets have been unsettled by the contradictory statements made by the Lula administration's economic ministers. When Minister of Social Security Carlos Lupi said on Tuesday that he planned to talk about the "anti-reform" of Social Security, investors quickly repeated his sentiments. Meanwhile, data issued by the IBGE on Thursday showed a 0.1% drop in manufacturing activity during the month of November. However, it is still 18.5% below its all-time high set in May 2011, and it is 2.2% below its level before the pandemic hit in February 2020. The next Fed decision, in February, will be heavily influenced by this Friday's monthly jobs report from the Labor Department.


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