Daily Market Pulse

Inflationary pressures to set a choppy day on FOMC


The U.S. Dollar Index, a coefficient used to value the greenback against a basket of six major currencies, retraced 0.15% and continued to correct last week's significant rally, as optimism returns to the market and investors seek riskier assets. The chairman of the Federal Reserve, Jerome Powell testified before Congress on the Fed’s response to the coronavirus crisis, arguing that while the Fed anticipated that the end of the pandemic would push inflation up this year, the spokesman recognized that price action has been larger than previously anticipated and may prove to be more persistent. Nevertheless, Mr. Powell underscored his view that shortages will fade over time, bringing inflation closer to the Fed’s 2% long-run target. Today we anticipate Fed officials interventions while preliminary Markit PMI readings are released alongside new home sales and current accounts. 


The EUR advanced 0.21% against the USD following the testimony from the chairman of the Fed which restored optimism in the financial markets. However, as Fed tapering and future interest rate hike talks start to make noise in the background, European Central Bank officials remain conservative, arguing that the Eurozone and the U.S. are clearly in different situations when it comes to the outlook on inflation and that it would be too premature for the ECB to adjust monetary policy at this stage. Market participants believe that in a scenario where interest rate differentials are so close, we could expect the EUR to bolster in line with the global recovery. However, as interest rate expectations climb in the U.S., this could weigh on the EUR as an extension of the ECB extra loose monetary policy would suggest capital flows to strengthen the greenback.    


The British pound edged 0.09% higher against the greenback as comments from Fed’s chief down talk inflation, arguing that the central bank expects inflationary pressure to ease as bottleneck issues in the supply chain are resolved. Market participants have turned their eye to the Bank of England (BoE) which is due to announce its interest rate decision on Thursday and is expected to leave monetary policy unchanged. However, the U.K registered the highest levels of inflation in nearly two years which has sparked a debate on whether the BoE will hike rates before the Fed. On the Brexit front, the lack of progress on dealing with the Northern Ireland border issue has had little impact on the pound and the market expects that an extension of the grace period will be granted to a new deadline of 30th June. 


The Japanese Yen fell 0.36% against the dollar as comments from Jerome Powell, chairman of the Fed, bolster optimism, therefore weighing on the safe-haven currency. The Bank of Japan released its April meeting minutes flagging that members of the committee agreed that Japan’s economy is likely to recover and that a positive cycle in which rising income leads to higher spending will gradually begin to kick off. However, policymakers believe that a pick up in inflation is likely to lack strength which suggests that adjustments on its monetary policy are unlikely and that Japan may lag from its major counterparts. 


The Canadian dollar continued to advance against the American dollar recording 0.41% gains during yesterday’s trading session. Comments from U.S. policymakers shifted risk appetite as investors seek riskier assets favouring commodities linked currencies like the CAD. Oil prices keep sustaining their momentum amid geopolitical tensions in the Middle East between the U.S. and Iran which have made the West Text Intermediate (WTI) price climb to USD 73.70, limiting the downside on the loonie and supporting any bullish initiatives from buyers. Amid a lack of major macroeconomic releases, we expect CAD to remain uncertain ahead of Canadian Retail Sales due later today. 


The Mexican peso rallied 0.57% against the dollar amid global recovery optimism and Mexico’s improved ranking as a recipient of Foreign Direct Investment. The United Nations released its World Investment Report 2021, which shows the Foreign Direct Investment (FDI) flows in the world. Mexico’s deputy minister of foreign trade highlighted that Mexico has climbed five places to ninth in the world last year and is heading the list in Latin America. According to the report, Mexico attracted USD 29 Billion of Foreign Direct Investment in 2020, a 14.6% decline from the previous year, but it is worth noting that the average slump in Latin American is 45%.  


The Chinese Yuan stepped back 0.31% against the greenback following the testimony before Congress of Jerome Powell, chairman of the Fed, and general weakness on the dollar amid improving global recovery prospects. The People’s Bank of China instructed financial institutions in China to identify the capital accounts of crypto exchanges and OTC dealers and cut off their payments channels. The latest measures from regulators have weighed significantly on the crypto market as a big portion of miners and important Bitcoin and Altcoin players are based in China. 


The Brazilian Real sustained its momentum by breaking a key resistance level thus consolidating prices last seen in March 2020. The breakthrough comes off the back of the generally weaker note of USD following the latest comments from Fed officials talking down inflation by arguing that it will converge to the 2% mark as the pandemic dilutes. Additionally, the Brazilian Real brings important momentum since last week, as the Brazilian Central Bank (BCB) hiked 75 basis points on its interest rate and market participants expect policymakers to hike again in the upcoming meeting in order to control the recent surge in inflation and avoid overheating the economy. 


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