The U.S. Dollar Index, which tracks the performance of the greenback against a basket of six major currencies, rallied 0.86% after the Fed announced its monetary policy and revised up its economic projections. Jerome Powell, Chairman of the Fed said during his press conference that the Federal Open Market Committee (FOMC) has decided to leave monetary policy unchanged, as previously anticipated, and that the committee will continue to deliver powerful support until the recovery is completed. However, U.S. economic activity indicators show signs of recovery and real GDP is on track to post its fastest increase in decades. The FOMC revised up their economic projections, adjusting growth and inflation estimates with Gross Domestic Product (GDP) to 7% year over year in 2021 from the previous 6.5%. Additionally, Personal Consumption Expenditure (PCE) figures are also projected to be 3.4% by December, up from 2.4% reported in March. Inflationary pressures come off the back of supply chain bottlenecks which were not previously anticipated and have struggled to meet the fast-growing demand from households. The Chairman of the Fed was the most “optimistic” since the pandemic started, noting a change to a more hawkish narrative while bringing forward rate hike expectations, pricing two interest rate hikes by the end of 2023.
The EUR fell 1.08% against the USD following the hawkish comments from Jerome Powel, Chairman of the Fed. The move was sparked by the revised projections of policymakers over the U.S. economy, which have increased the possibility of adjusting monetary policy earlier than expected. On the other hand, the EUR had a quiet session with second-tier news from European Central Bank (ECB) officials calling for European banks to meet climate risk expectations. However, today the European Consumer Price Index release is expected at 2% year over year, followed by ECB’s Lane speech which could induce relevant volatility if it follows the Fed’s change of tone.
The British pound retraced 0.67% against the dollar following the revised economic projections from the Fed, which suggests an earlier than expected adjustment in their monetary policy. However, U.K. inflation figures exceeded the Bank of England’s (BoE) target, igniting a rally in cable during the early trading hours of the day. Officials from the BoE said that the recent spike in inflation can negatively affect poorer households but the impacts could be diluted if wage increases continue apace. However, it seems unlikely for inflation to sustain, taking into consideration that furlough is due to end in the coming months.
The Japanese Yen dropped 0.64% against the American dollar amid hawkish interventions from Fed officials after the FOMC meeting on Wednesday. The JPY reached prices last seen in March and it currently tests key resistance on the USDJPY convention. The hawkish tone from the Fed underpinned U.S. Treasury yields which added some pressure to the Japanese Yen while the Bank of Japan (BoJ) continues to extend its pandemic relief program to support a fragile economy. Today we expect Japanese headline inflation figures with the Consumer Price Index expected to contract 0.7% year over year.
The Loonie retraced 0.81% against the dollar amid revised economic projections from the U.S. Federal Reserve leaving hawkish notes on the market. The Bank of Canada (BoC) released its Consumer Price Index Core estimates beating expectations at 2.8% vs 2.4% previously anticipated. Tiff Macklem, Governor of the BoC reported on Wednesday that policymakers witnessed some choppiness during the second quarter of 2021 following a very encouraging first quarter which triggered the first adjustment in monetary policy. The spokesman said that further adjustments to the bond purchase program will be gradual, and deliberate, based on incoming data. A dovish BoC has weighed on the Loonie of the back of a hawkish shift from the Fed.
The Mexican peso registered 1.9% losses against the USD, following the revised economic projection from U.S. policymakers. President Andres Manuel Lopez Obrador announced that he will be presenting to the chamber of deputies a package with three major constitutional reforms pertaining to the electricity sector, electoral model, and the national guard. The ambitious project will require support from the opposition which has gained greater participation in congress after the recent midterm elections. However, Fitch Ratings, the international rating agency raised its Gross Domestic Product (GDP) forecast from 5% to 5.3% based on the improving stats in coronavirus cases and positive progress on vaccination rollout, allowing the economy to reopen and bolster consumption.
The Chinese Yuan recorded a slide of -0.49% against the dollar amid hawkish comments from Fed officials and disappointing data from China. The latest data readings suggest that the strong recovery we witnessed earlier this year has slowed down. Chinese unemployment figures missed expectations, contracting 0.1% in May, releasing 5.1% readings, while Industrial Production fell from 9.8% year over year to 8.8%. Policymakers blame the recent spike in commodities prices to be affecting the cost structure of manufacturers as well as a global logistical bottleneck which has made it challenging for supply chains to meet the increase in demand.
The Brazilian real had a volatile trading session against the dollar with different inputs pulling the pair in different directions. The BRL rallied in the early hours of the day as President Jair Bolsonaro announced the extension of the emergency basic income program at least until September and possibly even more. Additionally, Brazil’s Central Bank (BCB) yesterday announced a new interest rate hike, raising the Selic rate by 75 basis points to 4.25%. Thus, the BCB continued its tightening cycle in a clear response to rising inflationary pressures. The Real rallied 0.99% after the news was released registering new year-to-date highs, but the gains were erased following the hawkish comments from the Chairman of the U.S. Federal Reserve Jerome Powell pushed the Real to close 0.2% lower against the greenback.