Daily Market Pulse

Fed Chair Powell fuels inflation expectations


After the Fed’s policy announcement on Wednesday, the dollar struggled to find a bid and the dollar’s index tumbled 0.53% against six major currencies. The remarks from Fed Chair Jerome Powell dampened speculation that the stronger economic prospects could push back the central bank’s economic stimulus. In general, market participants understood that the Fed’s stance is a bit negative for the dollar but good for inflation expectations. Regarding economic data, the weekly U.S. jobless initial claims report will be today’s calendar highlight, expected to show a decline in initial claims to a still-elevated 700,000.


The Euro edged up 0.76% as the U.S. dollar was on the defensive on Wednesday after the U.S. Federal Reserve signaled it will not raise interest rates till 2023. Domestically, yesterday's Consumer Price Index data in the Eurozone confirmed that the upturn in inflation paused midway through Q1. The headline was unchanged at 0.9% year-over-year. It is important to note here that inflation is still low and miles off the ECB's target, therefore there is no impact on the markets or policymaking. Looking ahead, investors will wait for Trade Balance in the eurozone, along with Labor Cost later in the day.


The British pound was up 0.46% against the greenback, recovering from three-day consecutive losses after it hit a near three-year high in February on the back of a fast vaccine roll-out. Yesterday’s gains were due to a weaker dollar after the Fed’s outcome delivered a dovish message, suggesting that interest rates will not rise until there is solid evidence the U.S. economy has fully recovered. On that note, the Bank of England is expected to take a similar approach and keep its benchmark Bank Rate at a historic low of 0.1% and its bond-buying program unchanged at 895 billion pounds later in the day.


Against the Japanese yen, the U.S. dollar inched down 0.13%, hovering near nine-month highs hit this week. The JPY remained firm after expectations that the Bank of Japan (BoJ) wants to avoid being left behind, as global interest rates rise, as this would force them to allow long-term interest rates to move around its 0% target by buying more bonds. The BoJ policy meeting is scheduled for tomorrow. On the economic data front, there is no major data to be released today. Investors will wait for February’s Consumer Price Index (CPI) reading also tomorrow. CPI deflation is likely to pull back to -0.4% in February, after deflation of -0.6% in January.


The Canadian dollar appreciated 0.31% against the U.S. dollar on Wednesday, extending gains for the seventh trading session in a row and landing at February 2018 levels. However, further gains were capped after lower-than-expected inflation reading in February. The consumer price index last month was up 1.1% compared with a year earlier, and up from the year-over-year increase of 1.0% recorded in January. The inflation reading is still below the overall rate of inflation, the 2% target of the Bank of Canada (BoC). In general, the Loonie is the best performing G10 currency on a year-to-date basis, thanks, in part, the increasing speculation that the BoC will be the first major central bank to taper its purchases of assets this year.


The Mexican Peso, which has been driven by international headlines, in particular from the U.S., edge higher almost 1% against the greenback on Wednesday after the U.S. Fed pledged to keep the interest rate near zero at least through 2023. On that note, the Fed also stuck firmly to a dovish message despite upgrading the outlook for the U.S. economy. Elsewhere, Mexico’s main equity index has rebounded about 9.5% year-to-date, the best performance in LatAm, despite the rising political risk, and the Covid-19 pandemic. The shares’ rebound was thanks, in part, rising commodity prices, the prospect of lower interest rates, and the strength of the U.S. economy.


The Chinese yuan, once more, closed flat against the U.S. dollar on Wednesday. The outcome from the Fed policy meeting came after the ringing of bells in the Asian markets. Therefore, the Fed’s dovish stance will reflect through today’s session. It is expected that the CNY will advance as investors are set to cut back their exposure to the safe-haven U.S. currency. Looking ahead, all eyes will be on the first face-to-face meeting between the U.S. and Chinese senior officials scheduled for today and Friday. Media reports have called the meeting a “welcome development” that revived hopes for “engagement” and “high-level strategic dialogue” while cautioning that “one day of talking is not enough.”. Any surprise from the meeting could cap further CNY’s gains.


With inflation expectations quickly deteriorating, Brazil’s Central Bank increased its interest rate (Selic) in 75 basis points, which was well above the market’s consensus, between 25bps and 50 bps. The Central Bank not only delivered the biggest interest rate increase in more than a decade but also signaled for the meeting on May 4th another hike of 75 bps. On the one hand, it is likely to support the Brazilian Real, which has dramatically depreciated over the last months amid investor concerns about excessive public spending. On that note, the BRL inched up 0.70% against the greenback, on Wednesday. On the other hand, Brazil still needs a low-interest rate as the economic recovery remains fragile. Elsewhere, there are better prospects for reforms – the tax reform bill likely will be ready soon – will support the market.


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