Daily Market Pulse

FOMC bolstered demand for dollars amid tapering expectations


The U.S. dollar index, a benchmark used to assess the performance of the greenback against a basket of six major currencies, remained steady ahead of Federal Open Market Committee minutes, which following the release, triggered a bullish rush, edging 0.21% higher as the minutes confirmed that tapering the asset purchase programme is on the agenda. Several policymakers believe that the threshold of substantial further progress has been met, and the minutes from the July meeting suggest that the central bank is tilting toward reducing its bond purchase scheme. However, taper-hungry hawks might be disappointed as the Fed showed that there is no rush in bond tapering, and expectations shifted to November as the most appropriate time to taper the stimulus, as supposed to September which different market participants anticipated. The greenback also gained from safe-haven flows derived from China’s tech slash and rising Covid cases globally, which, in combination with a study showing that the efficiency of vaccines fades with time, is also contributing to the dampening mood. Coming up, U.S. jobless claims are expected to show a minor decline while the Philadelphia Fed Manufacturing Index is due to remain close to its previous release around 21.9 points. 


The common currency retraced 0.22% against the dollar, reaching its lowest since November 2020 after the FOMC minutes suggested that tapering the bond purchase program is on the agenda of policymakers before the end of 2021. However, minutes showed that policymakers are not in an urge to taper stimulus and that ongoing concerns are still latent. Inflationary pressures, arising from supply chain bottlenecks, remain “transitory”, while officials realised that several measures are close or above the average inflation target of 2%. A matter worth noting is that the minutes outlined the importance of ensuring that there should be no link between tapering and the timing of rate hikes. Circling back, further inputs from policymakers will be released in the Jackson Hole event, but for now, we remain assured that the FOMC does not need to taper as soon as market participants previously anticipated. 


The British Pound remained on the backfoot following the release of the FOMC minutes from July’s meeting, which suggested that the Fed’s tapering is well on the way. Cable ignited a 0.44% drop during the course of the Asian trading session, reaching the lower level in over a month. The minutes revealed that officials felt the recent inflation readings were likely to be “transitory”, but most felt it could be appropriate to start tapering the asset purchases this year. However, U.K. inflation data showed a sharper slowdown than previously anticipated, although the focus was more on Wednesday's strong data from the labour market which reinforced the prospect of a rate hike cycle commencing in the second half of next year. The Consumer Price index was expected to post a 2.3% annualized reading following a 2.5% rise in June. 


The Japanese Yen remains at the crossroads as the spike in Coronavirus cases compromises economic fundamentals in the country amid restrictions that will impact the economic performance in order to control the virus. However, the safe-haven appeal of the Japanese Yen underpinned its appreciation, as Covid jitters and economic slowdown fears remain global instead of being exclusively focused on Japan. The greenback advanced following the release of FOMC minutes, although the pair flipped its direction, erasing previous gains during the Asian trading session. Coming up, the National Consumer Price index is expected to post yearly reading at 0.6%, increasing from a -0.5% contraction in its previous release.  


The Loonie retraced 0.28% against the dollar during yesterday’s trading session and extended further losses after the FOMC minutes igniting a CAD bearish run, recording 0.72% losses amid tapering expectations and crude oil prices dropping. Despite better than expected inflation figures in Canada, the Loonie failed to capitalize as FOMC minutes and weaker oil overwrote the impact on the pair. The BoC Consumer Price index core posted annualized reading at 3.3% vs 2.8%, significantly outperforming expectations, while annualized headline inflation was published at 3.7% vs 3.4% expected. However, concerns around the economic fallout driven by the fast-spreading delta variant, along with political tensions in Afghanistan, weighed on investor sentiment, diminishing demand for riskier assets and prospects of recovery. The West Texas Intermediate (WTI) fell 1.68% during yesterday's trading session, and today it is exchanging hands 2.09% lower amid demand expectations removing significant support from the commodity-linked currency. 


The Mexican Peso remained subdued against the greenback, following the release of FOMC minutes which suggested tapering of the stimulus programme before the end of 2021. The Peso continues to retrace amid lingering minutes through the course of the Asian trading session, trading 0.59% lower from yesterday’s close. Moreover, President Andres Manuel Lopez Obrador (AMLO) said that he currently does not see the need for booster doses of the vaccine against Covid-19 to be applied in Mexico. The comments from the Mexican President come following an increase of cases in the country, spiking from 15k daily cases to 28.9k, dampening the mood with several critics around the President’s stance against the Virus and his initiative to reopen schools.


The Chinese Yuan fell 0.18% during the early hours of the trading session following the impact of FOMC minutes suggesting tapering of the bond purchase programme in the upcoming months. Moreover, China’s tech-slash keeps market participants cautious with several flows underpinning the greenback as Asian stocks edge lower and the American market becomes progressively more attractive. However, market participants remain cautious ahead of the interest rate decision from the People’s Bank of China tomorrow, which will provide a better view for investors on the contrast of monetary policy approach. 


The Brazilian Real fell 2.02% during the early hours of the trading session, with market players digesting the latest FOMC minutes, which bolstered the demand for the dollar amid tapering expectations in the coming months. Additionally, the Brazilian monetary council approved USD 249 million in aid for coffee producers, whose crops have been impacted by the recent frost. Unusually cold weather swept across the south of Brazil last month, with freezing temperatures damaging an estimated 200k hectares of coffee crops in several states, affecting prospects for 2022 and driving coffee prices higher in the domestic and international markets. 


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