Daily Market Pulse

Investors cautious ahead of Consumer Price Index and G7 summit


The U.S. dollar remained stable against most of its peers with sustained pressure on the downside amid the persistent dovish stance of the Fed due to the lack of progress in inflation and employment. The market will closely follow the release of  the U.S. Consumer Price Index later today, expected at 4.7% year over year, picking up from the May release at 4.2%. Fed officials considered the previous inflation figures to be transitory and that pressures should ease by the fall. The drivers fueling the inflation, including fiscal spending and the rush by households to make the most out of the economic reopening, are likely to fade away. On the other hand, the U.S. is unlikely to meet the target of getting 70% of U.S. residents partially vaccinated by the fourth of July, mainly due to the reluctance from patients. The White House launched a month-long PR campaign blitz to combat vaccine hesitancy and increase the urgency to get the shots. 


The shared currency remains steady ahead of the European Central Bank (ECB) Interest Rate decision due later today. Fundamentals suggest that even if optimism has flooded Europe, there is still a need to materialize a sustained recovery from the pandemic before policymakers adjust monetary policy. However, ECB board members will have the opportunity to discuss tapering, but market participants expect unchanged interest rates while holding the bond purchase program intact. The market will confirm the ECB outlook on the European economy and economic projections, which in combination with optimistic comments from Christine Lagarde, President of the ECB, could fuel a rally in the EUR. 


The Sterling retraced 0.27% against the greenback, testing the lower boundary of the three-week horizontal channel. The downward pressure came off the back of the failed Brexit discussion between David Frost, U.K Brexit Minister, and Maros Sefcovic, European Commission Vice-president. The headlines reported that no breakthroughs were achieved and that after a frank and honest conversation, they couldn’t find common ground on the Northern Ireland impasse. The Brexit pressure was accentuated by President Joe Biden, who has accused U.K Prime Minister Boris Johnson of “Inflaming” tensions with Northern Ireland. Later today, we expect the Bank of England’s Haldane's speech, who has supported the initiatives of starting tapering stimulus in the U.K. due to the recent strong performance of the housing market.  


The Japanese Yen stepped back 0.13% against the dollar as U.S. yields pushed slightly higher ahead of Consumer Price Index data due later today. The market remains cautious ahead of inflation data while the Japanese economic calendar remains light for this session. However, market participants have started to identify risks around the massive accumulation of assets that the Bank of Japan (BoJ) had achieved during decades of expansionary monetary policy. Their latest monetary policy adjustment was not to purchase any ETF linked securities this month, adding up to a total exposure of USD 149 billion in their balance sheet. Analysts believe that if not appropriately managed this could provide adverse repercussions to the Japanese stock market, which hit previously a three-decade high suggesting a potential overvaluation inflated by the central bank.      


The Loonie remained virtually unchanged, briefly rallying 0.4% but erasing any gains during the North American trading hours. Moreover, the Candian dollar continues to trade within the three-week horizontal channel, which currently tests the lower bound for the Loonie as investors offload risk ahead of important inflationary data. Additionally, the Bank of Canada (BoC) decided to leave interest rates unchanged at 0.25% and to stay on course to reduce further stimulus in the upcoming months. The BoC was optimistic in their economic outlook, saying that the economy would “rebound strongly” as vaccinations against COVID-19 picked up. The interventions from policymakers were pretty much in line with market expectations avoiding any impact on the market. However, the strong bullish sentiment has eased as West Texas Intermediate (WTI) edged lower following an increase in gasoline inventories.      


The Mexican Peso recorded new five-month highs against the USD after the World Bank increased the Mexican economic growth forecast. The Global Economic Prospects report improved the Mexican growth estimation by 0.5%, expecting the economy to expand 5% by the end of the year. The improvement in Mexico's forecast is aligned with expectations of a 6.8% rebound in the manufacturing and services sectors which are due to benefit from the rise in demand from the United States. However, risks are still imminent if the government fails to rollout an efficient vaccination program which could spark adverse market reactions and the possibility of Mexico being affected by natural disasters.  


The onshore yuan advanced 0.2% against the dollar following strong Producer Price Index (PPI) results. The increase in PPI reflects the pick up in the manufacturing sector which remains ahead of the changes in the Consumer Price Index (CPI). However, this should hint that earning margins might narrow in the next quarter but we could also expect businesses to transfer the latest increase in input prices to consumers in order to protect profitability. 


The BRL retraced for the first time in two weeks after Brazil’s National Statistics Institute released the latest figures in retail trade, which grew 1.8% in April, aggregating to 3.6% yearly variation, higher than their pre-pandemic levels. However, despite the overall positive figures, the “supermarket, food & drink category”, which accounts for 49.2% of total retail trade shrank 1.7% in the same month, pushing the Real to fall back 0.54% during yesterday's session. Meanwhile, Fernando Bezerra Coelho, the government leader in the senate and his son are being accused of corruption by Brazil’s Federal Police, adding to the long list of scandals associated with the Bolsonaro Government.  


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