Daily Market Pulse

Fed remarks have set hawkish expectations for FOMC minutes


The U.S. Dollar Index, a coefficient used to value the greenback against a basket of six major currencies, sustained gains advancing 0.32% during yesterday’s trading session amid weak U.S. data and expectations ahead of Federal Open Market Committee (FOMC) minutes due later today. The ISM Services PMIs, which were expected to fall from 64 to 63.5 in June, missed expectations after releasing 60.1 points. Despite the worse than expected PMIs, figures were released well above the 50-point mark which signals expansion and any result above 60 suggests fast growth, well above pre-pandemic levels, supporting the demand for dollars. Additionally, upcoming FOMC minutes have set hawkish market expectations, given that in the last meeting, the Fed made a substantial hawkish shift amid solid economic indicators and persistently higher than expected inflation. Market participants expect to find further details from the bullish dollar narrative derived from Fed officials during the monetary statement made a few weeks ago, which continues to linger. However, the greenback refused to retreat despite a correction in Treasury Yields falling at 1.36%, following the worse than expected ISM Services PMIs while Nasdaq recorded new all-time highs during yesterday’s trading session, manifesting trends on risk sentiment. 


The EUR retraced 0.34% against the greenback amid U.S. PMIs failing to meet expectations, but sustained fast pace expansion results. Generally, the Eurozone's weak data with morale indicators suggest a slowdown. The ZEW survey - Economic sentiment in the EU, released 61.2 points while market expectations were set at 84.4 points, and in Germany, the same figures followed a similar trend posting 63.3 vs 75.2 previously anticipated. Additionally, German factory orders grew 54.3% year over year, far below the expected 75.4% while May figures were revised up from 78.9% to 80.2% year over year. Moreover, Retail Sales outperformed expectations, recording a 9% yearly growth vs 8.2% expected, but these positive results evened out following a revision on the previous month’s data from 23.9% to 23.3%. Later today, the European Commission will release the Economic Growth Forecast, which will refresh expectations amid recent data and developments. 


The Pound Sterling rallied 0.48% against the greenback, supported by expectations of sustained U.K. economic recovery underpinned by the lift of COVID-19 restrictions by 19th of July announced by U.K. Prime Minister Boris Johnson. Government officials changed their approach against COVID-19 after announcing that 64% of British adults are fully vaccinated and that the U.K. has decided to reopen despite the increase in coronavirus cases which are expected to reach 100k daily during the summer. However, the momentum diluted with cable reverting direction, closing 0.26% lower as market participants eye the upcoming FOMC minutes, which have set hawkish expectations based on the shift we witnessed in the previous meeting. Fed officials acknowledged in their last monetary statement their underestimation of the effect of bottlenecks in the supply chains due to disruptions caused by the virus, which has added inflationary pressures sustained throughout the economic recovery.       


The Japanese Yen appreciated 0.27% against the greenback, following a decline in U.S. Treasury Yields after the release of U.S. ISM services PMIs. The U.S. Treasury yields fell to levels last seen in February this year over fears that economic recovery is slowing down, reducing expectations that the Fed will adjust monetary policy in the immediate future. However, lower yields weighed on the demand for dollars as investors de-risk their positions amid the risk-off mood. Ahead of the FOMC minute, the safe-haven appeal from the Japanese Yen has held its ground as Treasury Yields fall and risk appetite dampens amid rising cases of COVID-19 globally. 


The Loonie fell 1.04%, making it the worst-performing G10 currency against the greenback. The sharp retracement comes off the back of rising demand for dollars and a correction in crude oil prices. The West Texas Intermediate (WTI) fell 2.63% after Saudi Arabia and Russia failed to reach an agreement with the United Arab Emirates (UAE) on the output quotas for the cartel. The impasse has induced fears in market participants looking to avoid a crash in oil like the one we witnessed last year. The crude oil correction removed support from the Canadian dollar. igniting a bearish move intensified by the broader risk-off mood ahead of FOMC minutes and fears of recovery slow down in the U.S. following weak PMI figures. Later today, Ivey Purchasing Managers Index is due to release figures for June. 


The Mexican Peso remained subdued, retracing 0.83% against the USD amid a broader risk-off sentiment supporting the greenback which has weighed on Emerging Market currencies and commodities linked pairs, accentuated by the latest correction in crude oil as the OPEC+ fails to reach an agreement. However, market participants believe bearish pressure on the MXN to be transitory as a hawkish Banxico is expected to resume an aggressive tightening cycle which should support the Peso in the medium term. Later this week, inflation reports in Mexico will provide some guidance on the pace of tightening monetary policy from Mexican policymakers.         


The Onshore Yuan fell 0.28% against the dollar amid risk-off sentiment ahead of the much-expected FOMC minutes, and growing fears around Delta variant spreading globally. Market participants believe that the Yuan is likely to sustain a two-way fluctuation led by PBoC interventions, as market participants should not bet on on-way declines for extended periods of time. Monetary policy is expected to remain supportive as the economic recovery remains unbalanced, the pandemic outlook remains uncertain and domestic inflation remains under control. 


The Brazilian Real remained under pressure, recording 2.24% losses during yesterday's trading session. Political risks continue to intensify as corruption scandals weigh on the popularity of President Jair Bolsonaro ahead of the Presidential race against Lula Da Silva. In order to counter the losses in the polls, the Brazilian government is looking to extend the pandemic cash assistance to low-income households. The cash allowance extension seems to be purely political and has been scrutinized as populist by the opposition. Market participants believe that political risks are not fully reflected in the BRL’s value ahead of the upcoming presidential elections next year.   


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