Daily Market Pulse

The Dollar’s down, and it awaits CPI data


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, edged 0.32% higher during Thursday’s closing session amid a broader cautious mood driven by mixed headlines on Omicron. However, after touching high levels, last seen on November 24th, on Tuesday, the U.S. dollar took a breather and fell slightly during the early hours of Friday. The weekly downtrend is an indication that traders are cautious ahead of key U.S. inflation data set to be released at 6.8% YoY, up from 6.2% released in the previous month. Yesterday's increase was mostly driven by risk-averse flows, sponsored by underpinning geopolitical tensions. Meanwhile, despite the broader rise in inflation expectations, some indicators suggest that inflation eased in recent sessions. The 10-year breakeven inflation rate, which measures inflation expectations from the St. Louis Federal Reserve, snapped a four-day recovery from early October lows, signaling odds of a negative surprise for the Fed hawks. Additionally, market participants are concerned over worsening virus woes which can influence the Fed’s hawkish action. Moving ahead, traders will be looking out for U.S. Inflation data and Michigan Consumer Sentiment Index to provide further direction. 


The Euro suffered 0.43% against the dollar towards the end of Thursday’s session. The Euro plummeted the most in two weeks yesterday, amid talks over the European Central Bank’s (ECB) extended support for an easier monetary policy. Additionally, risk-off mood and fears of a hawkish Fed before the release of crucial inflation data exerted further downside pressure on the Euro. Meanwhile, the ECB is inclining towards a temporary asset purchase programme boost, and this, along with headlines of Omicron-related restrictions, has only added further downside to the Euro. Looking forward, traders will await Germany’s Harmonised Index of Consumer Prices for November, expected at 6% annually, followed by a speech from the ECB’s president Christian Lagarde to provide a new direction for the Euro.  


The Sterling rose by 0.12% against the greenback during Thursday’s closing.  The Sterling rose higher during the early hours of Friday and was observed to be attempting a breakthrough from its yearly low levels touched on Wednesday. A subdued U.S. dollar price sponsored the upward movement for Sterling, while a combination of factors limited the upside movement. This includes anticipations that the Bank of England will delay its interest rate hike decision amid Omicron restrictions in England. This, along with Brexit-related uncertainty, acted as headwinds for Sterling. On the economic data front, the UK Gross Domestic Product (GDP) showed a 0.1% growth in October, lower than expectations of 0.4%. Additionally, the manufacturing production data was released at 1.3% annually against the expectations of 1.7%, which in turn, did little to impress bullish players. Looking ahead, traders will take cues from NIESR GDP estimates and U.S. inflation data release to provide fresh impetus to the Sterling. 


The Japanese Yen surged 0.15% against the U.S. dollar on Thursday’s closing session, trimming its previous session’s losses. The U.S. dollar has struggled to move upwards against the Yen, and instead extended its sideways movement for the fourth consecutive day on Friday. The safe-haven Japanese Yen benefited from a softer risk tone amid mixed stories about the Omicron virus. This, in turn, was viewed as a crucial factor limiting the U.S. dollar's upward potential. However, the fall is being cushioned by an increase in the U.S.’s Treasury bond yields. This, together with hawkish Fed expectations, worked as a tailwind for the U.S. dollar, providing some support. Moving forward, the U.S. CPI data, which is anticipated later in the early North American session, will provide hints regarding the Fed's next policy move and plans on interest rate hikes.


The Loonie declined by 0.47% against the greenback on Thursday’s closing.  The Loonie holds firmer against the U.S. dollar during Friday’s European morning session, limiting any further downside pressure. Meanwhile, the Bank of Canada (BoC) confirmed no policy shifts in its interest rate strategy, while the BoC deputy governor, Tony Gravelle, mentioned that inflation risks are slightly higher than usual. Additionally, WTI crude oil prices are retreating around $70.50, up 0.23% intraday, after falling the most in a week the previous day. The pessimistic tone and danger flowing from China, one of the world's top oil consumers, continues to put downward pressure on the pricing of Canada's main export. Moving on, the Consumer Price Index and Michigan Confidence index for November will be crucial to determine near-term movement for the Loonie. 


The Mexican Peso fell 0.20% against the dollar during Thursday’s closing, taking a break after recording three-day gains against the greenback. Mexico's Peso fell on Thursday, as rising inflation exacerbated concerns about the country's already faltering economic growth. The Bank of Mexico (Banxico) boosted its benchmark interest rate by 25 basis points to 5% last month, the fourth rise in a row. The current year-end inflation target set by the bank is 3% plus or minus a percentage point. According to economists, the Mexican Peso's devaluation pressures would likely drive the central bank to stay conservative in its monetary policy assessment and increase the benchmark interest rate by at least 25 basis points at the December meeting. Investors are now awaiting U.S. inflation data today that would provide further direction for the Peso as well as to set the tone for the Federal Reserve's interest-rate approach at its policy meeting next week.


The Chinese Yuan dropped by 0.49% against the U.S. dollar at the closing of Thursday’s session. On Friday, the offshore Yuan stayed in a volatile trading range near subdued levels against the U.S. dollar, having fallen from its three-year highs in the previous session as Beijing reined in currency speculations. Additionally, the People's Bank of China set a considerably lower-than-expected fixing rate of 6.3702 per dollar, compared to 6.3498 the previous day. The move also came in response to a late-Thursday regulation requiring banks to retain more foreign currency in reserve, which was interpreted as an attempt to slow the rate of the Yuan’s appreciation. Additionally, the Shanghai Composite Index fell 0.18% and the Shenzhen Component Index fell 0.24%, easing slightly from a PBOC-driven rally as renewed concerns about the Omicron's economic impact dampened risk appetite ahead of key U.S. inflation data and a busy central bank schedule next week. Meanwhile, fundamentals such as solid exports, a record trade surplus, and plentiful onshore dollar liquidity continued to underpin the currency, with continuous Yuan purchasing witnessed from domestic enterprises. 


The Brazilian Real fell 0.82% against the U.S. dollar on the previous day’s closing after two consecutive sessions of goodish gains against the greenback. The strengthening dollar weighed on Latin American currencies, with Brazil's Real falling as growing inflation heightened fears about the country's faltering economic development. Brazil's 150-basis-point interest rate boost on Wednesday had little to no effect on the Brazilian real against the greenback’s strength. Brazil's central bank raised its benchmark interest rate to 9.25%, up from 2% at the start of the year, and warned that another rise of the same amount would be inevitable at its next monetary policy meeting in February. Meanwhile, economists predict that the Brazilian Real will fall further due to worries about the South American country's debt levels and uncertain demand for important commodities such as iron ore, as well as problems in China's property building industry. Furthermore, they are concerned that the inflation-adjusted policy rate will stay negative owing to Brazil's high levels of inflation.


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