Daily Market Pulse

Dollar consolidates in the aftermath of FOMC

5 minute read


The U.S. dollar index, a useful tool used to benchmark the valuation of the greenback against a basket of six major currencies, sustained momentum, appreciating 0.56% during yesterday’s trading session. The greenback looks now to consolidate robust gains ahead of final data releases for the week as investors eye North American job reports. Investors expect Nonfarm payrolls to rise by 425k in October, following the disappointing readings in September which released 194k which raised serious concerns among market participants and policymakers. Following the announcement from Jerome Powell that policymakers will initiate the tapering cycle of its bond purchase programme, investors will shift their focus as to when central banks will consider raising interest rates. Upcoming job reports will be crucial in assessing the recovery of the economy from the pandemic, as unemployment limps, progressing at a slower pace than expected. The U.S. Treasury Yields erased their pre-fed gains, although staying afloat above 1.5%. Risk appetite remains intact, as S&P 500 reached a new all-time high on Thursday and U.S. stock index futures traded flat during the early hours of today’s session. Moreover, the U.S. House of Representatives will vote today on President Joe Biden’s Build Back Better act. Meanwhile, several outlets reported that the U.S. and China plan to reopen the consulates that were closed last year. 


The common currency suffered severe losses and came within touching distance of the year lows against the greenback. Market participants remain cautious ahead of job reports to be released in the U.S. later today, which allowed the pair to consolidate during the early hours of the trading session. Moreover, ECB’s Vice-President Luis de Guindos reiterated once again that current inflationary pressures remain transitory and it is expected to subside next year. On the other hand, ECB Board member G. Mklouf said the central bank needs to be careful when it comes to inflation, adding that he would support taking action on the issue sooner rather than later, noting that high prices could linger for longer. 


The British Pound registered heavy losses against the greenback after the Bank of England refrained from hiking interest rates triggering a sharp repricing of rate hike expectations in the coming year. Market participants expect Sterling to suffer further downside motion if the “Old Lady” fails to respond to higher, with it expected to hit 5% next year. The pullback from hiking rates adds pressure to British policymakers, as participants become fearful that the BoE is falling behind the curve in response to higher inflation, making it lose credibility amongst market participants. 


The Japanese Yen continues to trade sideways against the dollar, enduring mild losses during the early hours of the Friday session. However, the pair trades within a tight horizontal channel, coming very close to the Yen’s lowest since 2018. The yen is the top performer within its G-10 currencies, amid marginally lower treasury yields and mixed stock indexes ahead of all-important U.S. Nonfarm payrolls. A strong payroll report is likely to reinforce the post-FOMC pricing, suggesting the Fed will let inflation overshoot further. However, a pick-up in yields could extend further weakness of the Yen.   


The Canadian Dollar remains at the mercy of crude oil price fluctuations, which keep adding pressure to the Loonie. The West Texas Intermediate reversed sharply after flirting with USD 83 dollars per barrel, dropping below USD 80 per barrel by yesterday’s close. The move comes off the back of a number of important updates for crude oil markets today, which can be neatly summarized as 1) As expected, OPEC + agreed to hike output by 400k barrel per day in December; 2) The U.S. isn’t happy about the decision OPEC + made and is assessing options (Be it to release oil from strategic reserves or even ban crude oil exports); and 3) Traders are citing post-OPEC + profit-taking, technical selling and recent negative China Covid-19 outbreak news as major drivers of the sell-off. 


The Mexican Peso stepped back 0.32% against the greenback during yesterday’s trading session, amid softer U.S. Treasury Yields sustained above 1.5% in the aftermath of the Fed’s tapering announcement. However, Morena’s Party electricity reform continues to raise concerns in the Mexican market, as the bill intends to increase the control of the state-run electricity firm Comision Federal de Electricidad (CTE) over the domestic electricity market from 38% to 54%, drawing significant criticism in the country. President Andres Manuel Lopez Obrador (AMLO) proposed to postpone and push back on the debate around the reform and is looking to reschedule to no later than 15th April 2022.  


The Chinese Renminbi sustains pressure from the dollar following the announcement from Fed officials to start tapering its bond purchase programme. Moreover, China’s government bonds are set for their biggest weekly advance since July after Beijing boosted its liquidity injection twice in three days and global bonds rallied on waning rate hike bets. The spike in bonds came after the People’s Bank of China increased its injection of short-term cash to CNY 100 billion (USD 16 billion) Friday after boosting it to CNY 50 billion earlier in the week. 


The Brazilian Real remained firm during yesterday’s trading session, consolidating gains from the Fed’s tapering announcement. Additionally, the Federal Chamber of deputies approved a constitutional amendment that lifts spending caps so as to finance the government’s new flagship social programme, Auxilio Brasil. The news raises considerable concerns over the fiscal viability of this program and its repercussions on the country’s tightening conditions. Moreover, the trade surplus for October was reported the lowest since 2015 raising concerns amongst market participants. 


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