Daily Market Pulse

Fed holds rates near zero while Northern Ireland’s instability increases


As expected, the Federal Reserve left its benchmark short-term rate near zero, where it’s been since the virus outbreak erupted nearly a year ago. This has been done to help keep loan rates down and to boost borrowing and spending, hence fuelling economic growth. The Fed also maintained its pace of asset purchases at a $120 billion per month. As a result, both government bond yields and the dollar index dropped on Wednesday. The yield on 10-year Treasuries declined one basis point to 1.61% while the USD slid 0.42% against major peers. Looking ahead, the extension of monetary support, along with the U.S. president’s fresh $1.8 trillion fiscal stimulus plan should (once again) raise market expectations for inflation and interest rates in the U.S., hence boosting yields and the USD. Elsewhere, U.S. GDP is probably the economic calendar’s highlight and it is forecasted to show growth strengthened in Q1.


Once more, the technical picture helped the Euro as strong demand for the currency was registered near to the 100-day moving average. International headlines, with the Fed offering no fresh clues, were also an important component that contributed to the advance (+0.3%) of the common currency against the greenback on Wednesday. On the other hand, the optimism took a hit after official data reported that German consumer confidence deteriorated unexpectedly heading into May as surging Covid-19 cases led to a re-tightening of restrictions on public life and businesses. Looking ahead, the economic calendar is packed with labor market and inflation figures for April from Germany, and inflation expectation also for April in the Eurozone.


The Sterling rose 0.24% against the greenback and notched its fourth straight daily advance on Wednesday. Although the GBP also took advantage of a dovish stance from the Federal Reserve, fresh developments in Northern Ireland sparked further upheavals in the region and limited new GBP’s highs. Yesterday, Northern Ireland’s First Minister Arlene Foster laid out her plan to quit, adding more instability in a country that has recently endured some of its worst violence in years.  Looking ahead, Foster’s decision will continue to spark tensions in the region and undermine any improvement made so far by London and Dublin, and thus could provide pressure on the Pound.


In Japan, the Japanese yen edged 0.11% up versus the greenback, as the yield on U.S. 10-year Treasuries declined one basis point to 1.61%. Unsurprisingly, the JPY continues to track Treasury yields tick-for-tick. However, the prospects for the JPY look dim as a renewed growth spurt from monetary and fiscal stimulus has raised market expectations for inflation and interest rates in the U.S., which would warm yields up once more, putting pressure on the JPY. On the data front, a raft of economic figures are due out, including Labour Market and Industrial Production data for March, as well as Inflation Index in Tokyo and Manufacturing PMI, both for April.


The Canadian Dollar printed solid gains (0.72%) on Wednesday and is now trading at its strongest level in three years. The CAD managed to take advantage of a retreating Dollar, as well as catalyze positive data from its local economy. In Canada, retail sales increased by 4.8% month-over-month in February, with annual growth at 6.0% year-over-year. The weekly EIA report showed that crude oil inventories in the U.S. rose by 0.1 mn barrels last week and are still 3.1% higher than their average at this time of year over 2017-19. Nevertheless, oil prices rose yesterday to $63.9/barrel, further boosting, the CAD. Over the past week, it is up by 4.1%. Looking ahead, further upside in CAD seems very likely as oil prices are still trading near pre-Covid levels and the Canadian economy is growing at a sustained pace.


Currencies of oil-exporting countries, including Mexico saw important gains on Wednesday as oil prices rose on the back of a confident outlook for demand from OPEC and its allies, despite the threat from India’s Covid-19 crisis. The Peso gained 0.84% against a weaker greenback, wiping off losses from the day before. Looking ahead, market participants have started pricing in the economic growth data that will be published tomorrow. According to a Reuters poll, the Mexican economy likely grew only marginally in Q1 due to the impact of the Covid-19 pandemic and energy shortages in February. However, the vice governor of the Bank of Mexico predicted that there will be no economic growth in Q1 after the National Institute of Statistics reported a monthly contraction of 0.3% in February.


China's yuan strengthened 0.06% on Wednesday after the U.S. Dollar slid to a nine-week low following a dovish outlook from the Federal Reserve. However, yesterday’s remarks from the U.S. President Joe Biden attacking China weighed on the Sino-U.S. relationship and capped further gains. Mr. Biden pledged to maintain a strong U.S. military presence in the Indo-Pacific region and promised to boost technological development and trade. Looking ahead, the impact from the Fed’s decision might have a lasting effect on the FX market, with the U.S. Dollar index's downward trend extending and the Yuan appreciating as a result.


The outcome from the latest Fed meeting spilled over into the Brazilian Real, which saw its strongest level since late February on Wednesday. As the U.S. dollar approached the lows seen at the start of the year, the BRL jumped as much as 2.01%. The local economy also collaborated with this upside movement after the Getulio Vargas Foundation's (FGV) consumer confidence survey indicated that consumer confidence marked its biggest rise in nine months in April, as households looked through the second wave of the pandemic to a brighter economic landscape in the coming months. On the other hand, weighing on the BRL, the Minister of Economy, Paulo Guedes, announced a wide-ranging reformulation of his team. The perception generated was that Mr. Paulo Guedes position continues to weaken and that this was the solution to open the door for the recreation of other ministries, with the predominance of the “Centrão” within the government. Looking ahead, more inflation data is set to be published, providing fresh price updates to Brazil’s Central Bank.


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