Daily Market Pulse

Brainard: “Sustained’ inflation at 2% is Fed’s goal; temporary factors don’t provide many signals”


The U.S. Dollar Index, which is used to measure the value of the dollar against a basket of major currencies, fell slightly ahead of PMI manufacturing figures which exceeded expectations and supported the greenback to recover during the American trading session (+0.11%). However, Federal Reserve Board Governor Lael Brainard said that the Fed sees economic progress and that the board is expecting further progress on the wage front. Despite the recent spike in inflation, the Fed considers the current price action to be transitory and that it will ease by the fall. The drivers fueling the strong growth, including fiscal spending and the rush by households to make the most out of the economic reopening are likely to fade away, especially after the summer. Governor Brainard has been one of the stronger voices arguing for patience before adjusting monetary policy as policymakers believe that “preemptive tightening” could deprive people of jobs and the board will be monitoring wage data very closely moving forward. Later today, the Fed's Beige Book survey will be released to the public, reporting on the current U.S. situation and giving a picture of the overall economic growth and sentiment.


The EUR reached last week's highs against the USD during the American trading session. The rally was driven by preliminary EU Consumer Price Index figures for May which managed to beat expectations and the Unemployment rate which also dropped 0.1% in April. Policymakers in Europe argue that inflation is likely to be temporary, mainly driven by short term euphoria induced by the economic reopening. However, the European Central Bank (ECB) believes that wage growth remains fragile making it difficult to support current inflation levels in the medium term. The momentum in EURUSD faded as liquidity started to dry up in the market but the pair continues to trade within bullish parameters.


Yesterday, Nationwide Housing Prices in the U.K. showed that the sector is booming with a +10.9% yearly variation, the highest level since August 2007. Cable reacted positively to the strong housing figures trading briefly above last week's highs and retracing back to the two week range. The Bank of England (BoE) is closely monitoring the surge in house prices as it weighs up the possibility of a faster than expected recovery from the pandemic and sustained inflation in the medium and long term. Sir Dave Ramnden, BoE deputy governor for markets and banking said that the bank won’t be complacent with inflation and if the committee is wrong about their view of a temporary inflation there is enough gun powder to tighten monetary policy as needed. 


The Japanese Yen had another quiet session continuing to cautiously recover from the previous day's losses. The Japanese currency was supported by positive capital spending data for Q1 and the Jibun Bank Manufacturing PMI for May, both beating expectations. On another note, the Tokyo Medical Association said today that the current pace of vaccinations in Japan is not going to prevent infections during the Olympics and that going ahead with the games can trigger a global spread of different variants of the virus. Despite the warnings from the Medic Association, the Japanese government seems to be determined to celebrate the Tokyo Olympics arguing that 80% of athletes and staff will be vaccinated and they expect participants to remain isolated in a “bubble” mainly in the village and venues throughout the games. Still, even if the Japanese government manages to vaccinate 36 million elderly as their goals are set, about 70% of the population won’t be inoculated by then.


The Canadian Dollar continues to apply pressure to the USD as oil prices jump and on the back of mixed Gross Domestic Product’s figures released yesterday. The market seems to have taken the crude oil rally onboard which hit a two year high as OPEC and allied reconfirmed a gradual production increase in line with growing demand expectations set by the global post-pandemic recovery. The OPEC Secretary General Mohammad Barkindo said that he did not believe that an increase in Iranian supply would be a cause of concern for the price stability of crude.    


The Mexican Peso continued to trade within a very tight range and remained pretty much unchanged against the USD. Despite trading very close to the year to date lows, the pair seems to be losing momentum due to a lack of fundamental drivers. Yesterday, the Central Bank of Mexico released a survey revealing that the private sectors increased their inflation expectations from 4.8% to 5% for the end of the year. The higher inflation expectation also adjusted the growth forecast from 4.8% to 5.15% as the price increases suggest higher earnings and a blended USDMXN consensus of 20.50.


Following the recent increase in deposit reserve rates requirements from the Peoples Bank of China (PBoC), the Chinese Yuan continued to retrace at a steady pace. The latest announcement of monetary policy suggests that CNY is unlikely to become a “Market-determined” exchange rate at least in the near future as the PBoC preached in previous weeks. Analysts expect the renminbi to weaken against the USD, especially as China's economy slows and the Yield differential between US treasuries and Chinese bonds adjust in favour of the greenback. Any further appreciation of CNY would trigger further interventions from the PBoC to control exports and growth.


BRL advanced 1.3% against the USD reaching levels last seen in January this year. The rally was sponsored by Copa America, the most important football (soccer if you are in the U.S.) tournament in Latin America, which, due to the difficult situation in Colombia, Brazil seems to be one of the best candidates to host the event alongside Argentina. President Bolsonaro said that if it would depend on him, there would be a Copa America in Brazil but different opposition senate benchers have raised their concerns about hosting such an event in the middle of the pandemic. The government released a massive vaccination pilot program in Serrana, which is a municipality in the state of São Paulo, where they managed to reduce the coronavirus death rate by 95%, while cases dropped 80% after adults received both doses of vaccines. The promising results of the pilot program will be a flagship argument for Bolsonaro to host the Football tournament. Meanwhile, the economic trend remains positive after official data showed a 1.2% increase in the GDP for Q1, well above what was expected by the market. 


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