Daily Market Pulse

Dollar loses momentum amid dovish FOMC minutes


The U.S. Dollar came under pressure after the minutes were released as the document showed that policymakers believe that “substantial further progress” has not been achieved yet, and therefore the monetary policy will remain unchanged in the foreseeable future. Additionally, committee members mentioned that conditions to initiate a tapering on the bond purchase program might be closer than anticipated. Inflation continues to raise concerns among major participants as most projections see risk on the upside while policymakers believe it is likely that these inflationary pressures won’t sustain in the long term. The U.S. equity markets rallied amid the Fed announcements while U.S. Treasury Yields edged lower following a conservative risk-on sentiment as the economy recovers. Jerome Powell, Chairman of the Fed, is set to provide his semi-annual monetary policy report to Congress on Wednesday next week where a more detailed view will be provided.


The EUR fell 0.28% against the dollar amid the release of FOMC minutes. The European Central (ECB) finalized its strategic review on Wednesday and is due to announce the results and updated forecasts throughout today’s trading session. Policymakers are due to announce some changes in the approach to stimulate inflation, abandoning the inflation target of “below, but close to 2%”, and shift to hard headline inflation of 2%. It's likely that German hawks will be keen to see inflation edging higher. Market participants wait for today's ECB’s President Christine Lagarde to provide a clear picture of the ECB economic view and share expectations around economic recovery and inflation. 


Cable remained subdued, recording mild gains for 0.03% following the release of the dovish FOMC minutes which concluded that substantial further progress still needs to be made. The FOMC is committed to maintaining an accommodative monetary policy until inflation stands above 2% while achieving maximum employment for some time. The U.K Halifax Price Index contracted 0.5% on a monthly basis, missing market expectations set at an 0.8% monthly growth. On the COVID front, the U.K. reported 32k new coronavirus cases, the highest figures since January this year. Despite the increase in cases, the U.K. government has stuck to its narrative that most restrictions will be lifted on the 19th of July, arguing that thanks to a successful inoculation programme, hospitalizations and deaths have reduced significantly. 


The Japanese Yen remained relatively unchanged against the dollar during yesterday's trading session amid expectations of FOMC minutes which concluded that inflation and unemployment are still far from the Fed targets. However, while FOMC minutes ignited a rally in the U.S. equity markets, Asian Indexes dropped, with Nikkei closing 0.9% lower and Hang Seng 2.8%. The significant correction in Japanese markets came off the back of strong regulatory interventions against tech companies which have induced a risk-off sentiment in the market. Investors rushed for Yen, breaking key trending technicals accentuated by concerns around the impact of the Delta variant in the APAC region. Today, the Japanese Yen is up 0.66% against the USD amid the capital flow into JPY. 


The Loonie continued to fall during Wednesday’s trading session amid FOMC minutes expectations and crude oil prices edging lower weighing on the Loonie. The West Texas intermediate retreated 2.23% following the OPEC+ fallout, which left oil traders in limbo for the time being with significant risks that output quotas could get out of control which would crash the price of the commodity. The lower oil price removed support for the CAD, allowing the pair to edge higher following the broader demand for dollars. On the data front, the Ivey Purchasing Managers Index posted growing results reporting 71.9 points in June vs 64.7 reported in May. The positive figures had almost no impact on the market but positive data adds to the fundamentals of growth in the Canadian economy. 


The Mexican Peso advanced 0.28% against the greenback despite a general risk-off tone, due to FOMC minutes release and a crude oil correction which had significant risks on the downside. Market participants believe that commodities-linked currencies may struggle to appreciate against the dollar in this context of risk-off and low oil prices. However, if the sentiment was to shift and the OPEC impasse was to be resolved, we could expect the Mexican Peso to rally underpinned by their attractive carry. Investors turned their eye to Mexican inflation which is due to be released later today. Expectations are set that the Consumer Price index will ease to 5.87% year over year in June from 5.89% the previous month. If inflation were to come higher than expected, Banxico will likely engage its tightening cycle faster than previously anticipated. 


The Chinese Yuan advanced 0.06% against the dollar following interventions from Government officials in the Wednesday trading session. The cabinet flagged the possibility of reducing the reserves required by banks in order to support SMEs that have been squeezed by an increase in Producer Price Index and raw materials. Vice Governor of the People’s Bank of China (PBoC), Fan Yifei, said during a press conference that policymakers will continue to keep the exchange rate stable and commit to making timely adjustments to monetary policy to support market participants. Additionally, the PBoC also announced that the digital Yuan will be trialed during Beijing’s Winter Olympic Games.       


The Brazilian Real registered its seventh consecutive day of losses, recording a 1.03% drop amid FOMC minutes expectations and government officials flagging that BRL is overpriced. The Economy Minister Paulo Guedes said during a hearing at the Lower House Committee that if there wasn’t an internal war within the government, the FX rate would be lower by now. Additionally, Brazil’s Guedes plans to amend the errors made in the income tax reform, and the government plans to compensate companies on dividends tax. Moreover, Retail Sales in Brazil failed to impress with a soft 1.4% monthly variation in May vs 2.4% previously anticipated, while previous figures were revised up to 4.9% from 1.8%. Coming up, IPCA inflation for June is expected to post 0.59% while previous figures reported 0.83%. 


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