Daily Market Pulse

Dollar retreats amid the ECB shift in policy


The U.S. dollar index, a coefficient that benchmarks the price fluctuations of the greenback against a basket of six major currencies, retraced 0.25% during yesterday’s trading session. It remains subdued amid investors regaining confidence and shifting to riskier assets, after the dovish “recalibration” of the pandemic stimulus programme from the European Central Bank and its revised up growth forecast and inflation figures. However, the virus continues to linger, and its presence keeps diminishing growth prospects in combination with accentuated supply shortages, all against the backdrop of some auspicious results from China and the U.S. returning to pre-pandemic levels. The release of initial jobless claims released upbeat results at 310k vs 335 previously anticipated and dropped from its previous release at 345k. Coming up, the U.S. economy is scheduled to post its Produce Price Index reports, where annualized figures are expected to rise from 7.8% posted in July vs the 8.2% market participants are anticipating.  


The common currency closed 0.9% higher against the dollar amid European policymakers recalibrating the pace of its QE programme due to inflation readings hitting the highest levels in nearly a decade. President Christine Lagarde announced its first step towards unwinding its Pandemic Emergency Purchase Programme, although the spokeswoman refrained from calling it tapering. Policymakers unanimously agreed to recalibrate the pace of the EUR 60-70 billion monthly purchases in order to deliver the goal of favourable financing conditions. The spokeswoman stressed that even if the ECB considers winding down the EUR 1.85 trillion PEPP, policymakers will continue keeping credit cheapo in its quest to boost inflation to its target. However, the decision behind “trimming” comes off the back of renewed growth and inflation forecasts for the Eurozone. The ECB upgraded its Gross Domestic Product forecast for this year to 5%, up from its previous 4.6%. Inflationary expectations are now seen at 2.2% by year-end, and falling to 1.7% next year, and 1.5% in 2023 - well below its 2% target. Today, the Eurogroup meeting might bring some interesting outcomes for investors, as well as Christine Lagarde’s speech which could renew market impetus. 


The British Pound is currently extending gains from yesterday's trading session (+0.47%), amid equity markets edging higher, and hawkish remarks from the governor of the Bank of England. The announcement from the ECB to start trimming its PEPP added an element of confidence that the worst of the pandemic has already passed and that policymakers are looking at the post-pandemic boom. The shift in risk appetite underpinned riskier assets, with U.K. equities gaining some momentum after 3 consecutive days of recording losses, as they attempted a bounceback thanks to the restoring sentiment. Moreover, the British Pound was further supported by hawkish comments from Andrew Bailey, Governor of the Bank of England, saying that minimal conditions for an interest rate hike have been achieved. However, the momentum in cable was capped by poor economic data, showing that recovery activity decelerated sharply in July due to the outburst of the Delta variant. Gross Domestic Product figures released during the early hours of today's trading session failed to impress, posting 0.1% monthly growth in July vs 0.6% previously anticipated. Additionally, Manufacturing production was broadly flat, while Industrial Production posted upbeat readings rising 1.2% vs 0.4% previously anticipated. The overall slowdown in output was blamed on consumer spending lagging in stores, legal services hit by the end of the stamp duty holiday, and the construction sectors contracted due to a shortage of raw materials. 


The Japanese Yen recovered 0.44% against the dollar, bouncing off the lower bound of the 3-week horizontal channel amid European policymakers adding pressure to the dollar by trimming stimulus. The U.S. Treasury yields remained under pressure after the U.S. government witnessed a strong demand for the sale of 30-year bonds and Christine Lagarde’s announcement of recalibrating the pace of the PEPP. The focus in the coming months will be on how to address the anticipated ending of the temporary stimulus programme next March. 


The Loonie is looking to close out the week with bullish momentum, extending gains from yesterday’s trading session crude oil prices edging higher thanks to restoring risk sentiment. On Wednesday, the BoC left its monetary policy unchanged and highlighted that if policymakers witnessed a pick-up in recovery in the upcoming 7 weeks, we could witness the Bank looking to step down its QE at the late-October meeting. Furthermore, The West Texas Intermediate (WTI) extended gains, edging closer to the USD 70 per barrel mark due to a broader optimism in global markets. Today, job reports will be key for market participants, where the unemployment rate is expected to drop from 7.5% to 7.3%. 


The Mexican Peso advances against the dollar, following inflation reports in the country suggesting conditions still need to improve. Lower headline inflation in August provides little relief to policymakers, as it remains well above the bank's target. The decline was mainly due to government price controls. Core inflation reading keeps extending its uptrend and is also considerably high. Market participants remain skeptical that the latest reading will be enough to secure another rate hike at the central bank’s next meeting. 


The Chinese Yuan is profiling to close out the week with strong momentum against the greenback, recording 3 consecutive sessions of recording gains and edging closer to the 2 week high. The rally comes off the back of U.S.-China talks fueling hope of an improvement of ties between the two nations. In October, China will kick off its private wealth programme, allowing investment between the southern region and Hong Kong. The talks come as a sign that tensions between the two superpowers are easing, improving the global risk sentiment in the eyes of global investors. 


The Brazilian Real erased all losses from Wednesday’s trading session, amid Bolsonaro's conciliatory tone during his latest speech and CPI figures reporting the highest levels in two decades. President Bolsonaro made conciliatory remarks about Supreme Court judge Alexandre de Moraes, Bolsonaro’s nemesis, at this stage. The head of state said he respects the country’s institutions and never had the intention to attack other branches of the government. President Bolsonaro even complimented magistrate Alexandre de Moraes, who had come in for the fiercest criticism during pro-government demonstrations during Brazil’s independence day. Moreover, Consumer Price Index spiked to 9.68% annualized, the highest reading in two decades also underpinned the latest correction of the currency, as most likely policymakers will be looking at further interest rate hikes in an effort to contain inflation. 


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