Daily Market Pulse

U.S. Federal Reserve Chair Jerome Powell at center stage


Yesterday, U.S. Federal Reserve Chair Jerome Powell ratified that interest rates will remain low and the central bank will keep buying bonds to support the U.S. economy. Against this background, the U.S dollar ended the day marginally stronger (+0.18%) against a basket of peers. Still, despite Fed’s Powell push back on the suggestions that loose monetary policy will lead to runaway inflation and financial bubbles, the market understood that his remarks consolidated the higher inflation expectations and gave the green light to continue to see a rise in the yields. Looking ahead, January’s U.S. existing home sales figure is set to show a continued housing boom amid increasing optimism about the economic re-opening as the decline in Covid-19 fatalities is exceeding expectations in the U.S.


The EUR/USD pair was steady, with the single-currency holding its one-month highs yesterday. Yesterday’s eurozone inflation data had a muted impact on the market, albeit it rose sharply in January, to 0.9% from -0.3% in December, suggesting some economic recovery in the first month of the year. Capping some gains, German Chancellor Angela Merkel urged caution in reopening schools and businesses, though the European Union is speeding up its vaccine program after stumbling out of the gates. Earlier this morning, GDP in Germany rose by 0.3% quarter-on-quarter in Q4, slowing from an 8.5% leap in Q3, slightly above the consensus and initial estimate, 0.1%. Thus, market participants will digest this fresh data, as it provides some clue as to what to expect in Q1.


The Pound, once again, rose 0.33% against the greenback, accumulating a high of almost 1.8% in the last four days. Much of that, thanks to the market which is increasingly optimistic about the economic re-opening. Also, yesterday’s economic data helped the GBP, after the labor market firmed up at the turn of the year, with employment broadly holding steady and year-over-year growth in wages recovering towards pre-Covid norms. This lifted the headline, three-month average, unemployment rate to 5.1% in Q4, from 4.8% in Q3. Today, MPC members Andrew Bailey, Ben Broadbent, Jonathan Haskel, and Gertjan Vlieghe will discuss this month's Monetary Policy Report with MPs. 


The Japanese yen was not able to absorb much of the optimism that prevailed in the FX market yesterday, with the JPY closing 0.16% down against the U.S dollar. The catalyst behind the upbeat mood which was hovering in the market were comments from the U.S Fed Chair Jerome Powell. Powell’s comments triggered the rebound in stocks, which helped dampen the JPY’s appeal as a safe-haven asset. At the same time, his remarks provided further support for the rise in U.S. yields, where yields move inversely to the JPY’s price. Today, the Bank of Japan will release the core inflation data for February.


The Loonie gained 0.23% against its rival U.S. dollar on Tuesday, holding near its strongest level since April 2018 as market players weighed prospects of higher inflation. Also, the CAD continued to receive support from surging commodity prices, including oil and gas. Still, Bank of Canada Governor Tiff Macklem shed some light on the economic recovery, commenting that Canada's economy will have a solid rebound in coming months as Covid-19 restrictions are loosened, and an expected ramp-up in vaccination is boosting confidence in sustained strong growth into 2022. Today, there is no material economic data, which means that market participants will pay attention to commodity markets and U.S. yields.


After six consecutive trading session printing losses, the Mexican peso managed to recover some ground (+1.01%) against the greenback, on Tuesday. The MXN tumbled 4% over the last six days on concerns about factory activity as fuel supply from Texas was impacted by an unusual deep freeze. Moreover, the current political noise has also put the MXN under strain in recent weeks. Looking ahead, the National System of Statistical and Geographical (INEGI) will publish the inflation figure for the first half of February, which likely will show that the mid-month CPI rose 0.2% month-to-month unadjusted in February, pushing the year-over-year rate up to 3.9%, from 3.6% in January. At the same time, INEGI will also announce December’s retail sales.


The Chinese yuan was flat on Tuesday as the greenback slipped against riskier currencies after U.S. Federal Reserve chief Jerome Powell reiterated the central bank will continue with its accommodative monetary policy stance, providing optimism about the global economic recovery.  On the other hand, Fed Chair Powell’s speech gave the green light to the U.S Treasury bond yields continue to rise. On that note, the CNY could face headwinds given changes in the China-U.S bond yield spread. No relevant data is due out today.


New emergency aid was under the radar after the rapporteur of the Emergency Constitutional Amendment released his proposal on Tuesday. The text establishes, (i) escape clauses from fiscal rules to create room for an emergency aid extension in 2021 and (ii) improvements in the fiscal framework of the federal government. The text brought some relief to the Brazilian currency, which edged up 0.45% against the U.S dollar. The BRL also recovered some ground after the U.S Fed Chair Jerome Powell gave an upbeat speech about the global outlook, favoring riskier assets. There are two important publications this afternoon, consumer confidence and mid-month inflation. The latter will provide further fundamentals for the next Brazil’s Central Bank policy meeting.


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