Daily Market Pulse

Dollar consolidates its losses after a heavy sell-off


The U.S. dollar faced heavy selling pressure during FOMC Chairman Jerome Powell's press conference late Wednesday and the U.S. Dollar Index recorded its largest one-day loss since early March, falling 0.87%. The dollar recovered its losses on Thursday as the market shifts its attention to the Bank of England's (BOE) policy announcements and Governor Andrew Bailey's press conference. The Fed raised its benchmark interest rate by 50 basis points, the greatest increase since 2000, and Fed Chair Jerome Powell stated that comparable moves were planned for June and July. Meanwhile, the spokesman underlined that the Fed is "not actively exploring" a higher rate hike of 75 basis points. Meanwhile, investors assessed economic concerns emanating from the Fed's struggle against increasing inflation, weighing over the greenback's safe-haven appeal. The weekly Initial Jobless Claims and Unit Labor Costs statistics for the first quarter will be released later in the session on the U.S. economic docket.


The Euro closed 0.96% higher in the previous session before cooling down its pace on Thursday morning. The common currency rose versus the U.S. dollar, bouncing off its daily lows after the Fed raised the fed funds rate by 50 basis points with no surprises and ruled out more aggressive hikes. Nonetheless, the Euro stayed close to lows not seen since December 2016 due to ongoing fears over the impact of the Ukraine war on the European regional economy. Furthermore, predictions that the European Central Banks will hike interest rates considerably more slowly than the Federal Reserve make the Euro difficult to gain some traction. In other news, the S&P Global Eurozone Construction PMI fell to 50.4 in April 2022 from 52.8 in March, indicating the slowest rise in global construction activity since September of last year. The slowdown was ascribed to continuing supply shortages, Chinese lockdowns, high raw material and construction prices, and uncertainty caused by the Ukraine-Russia war.


The Pound sterling gained momentum yesterday and closed 1.06% higher against the greenback before consolidating its gains this morning. The uptick was sponsored by the Bank of England's (BOE) rate hike prospects ahead of its monetary policy meeting taking place later today. The Bank of England is expected to raise the key benchmark rate by 25 basis points to 1%, marking the fourth consecutive rate hike, pushing borrowing costs to the highest since early 2009, amid the fact that inflation remains at 30-year highs and signs of a limping economy. Meanwhile, investors are worried that, given the loss of impetus in economic development, banks may become more patient in terms of future tightening actions. Investors will also be searching for any hints about the central bank's plans to sell part of its £847 billion in government bond holdings, as well as new inflation and growth predictions.


The Japanese Yen closed 0.81% higher in the previous session against the greenback. In the latest reports, after touching a six-year high of 0.251% on April 20th, as investors digested the central bank's dovish monetary policy meeting the previous week, the yield on the benchmark Japan 10-year JGB recovered back to 0.225% and remained close to the Bank of Japan's target limit. The Bank of Japan maintained its monetary policy and reaffirmed its commitment to defend the yield target by purchasing any amount of government bonds required on a daily basis to keep rates below 0.25%. Meanwhile, many economists believe the Yen will continue to fall to 140 per dollar, prompting the Japanese government to spend $100 billion to minimize additional losses.


The Loonie closed 0.73% higher in the previous session before losing its momentum on Thursday morning. The Canadian currency edged higher against the U.S. dollar, recovering from its lowest level in over four and a half months after the Federal Reserve hiked interest rates by 50 basis points as expected, and oil prices rose as a result of a phased EU ban on Russian oil imports. Furthermore, the Bank of Canada has already raised its overnight rate target by 125 basis points to 1% this year and has signaled further hikes as the economy enters excess demand and inflation remains well above the target. In March, Canada's annual inflation rate increased quicker than projected, reaching a 31-year high of 6.7%. Meanwhile, the most recent manufacturing PMI showed healthy operational conditions and prolonged the current phase of growth to 22 months, although it also fell to a joint 14-month low. This week, investors will be looking for the Canadian jobs report, which is likely to show the workforce expanding for the third straight month although by the smallest amount since last October.


The Mexican Peso surged 1.31% in the previous session before losing its pace on Thursday morning. The Mexican Peso traded higher, up from a 6-week low after the state oil firm Pemex reported a $6.17 billion first-quarter net profit, reversing a nearly $2 billion loss the previous year, and lowering its total financial debt to $108.1 billion from $109 billion at the end of 2021. Meanwhile, in April 2022, consumer confidence in Mexico increased to 44.3, up from 43.9 the previous month. It was the highest result since last December, with gains in both the present evaluation of Mexico's economy (39.8 vs 39.2 in March) and future economic prospects (49 vs 48.5). Elsewhere, Investors became anxious about the economy entering a recession as inflation rose to 7.5% in March, and the economy narrowly avoided a recession at the end of last year.


The Chinese Yuan closed flat against the greenback amid the holiday season. In the latest news, after returning from a holiday-extended weekend, the Shanghai Composite surged 0.68% and the Shenzhen Component gained 0.23% on Thursday, as China's central bank committed to utilizing appropriate powers to assist soften the impact of Covid-19 on the economy. The People's Bank of China (PBOC) offered monetary policy support to provide enough liquidity, assist banks in better meeting the financing needs of the real economy, and encourage consumer recovery. Investors also considered the dismal Chinese industrial and service activity statistics, which shrunk further in April amid growing viral lockdowns, emphasizing the need for stronger state support or even a change in Covid policy.


As expected, the Central Bank (BCB) increased yesterday the basic interest rate (SELIC) by 100 basis points, from 11.75% to 12.75% per annum. In addition, the monetary authority signaled a smaller increase next month amid double-digit inflation and rising price expectations and above official goals. At the same time, the Fed also raised its benchmark interest rate by 0.5% point, however, ruled out a further 0.75% point increase at the next bank meetings. Both events favored the Brazilian currency, which closed 0.88% higher against the greenback in the previous session. Meanwhile, Brazil is in one of the tightening cycles of the most aggressive interest rates in the world, struggling to control the price spiral driven first by the impact of the coronavirus pandemic and then by the war in Ukraine. The last IPCA registered 11.3%, well above the bank's target center of 3.5%. In general, the BCB faces a difficult dilemma to slow down inflation without slowing down the economy so hard that it hampers growth. Elsewhere, rising inflation and a sluggish economy are weaknesses for President Jair Bolsonaro, who is running for re-election in October, and currently, he is behind ex-president Lula in the polls of intention to vote.


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