Weekly market update 11 February – Dollar climbed after release of higher-than-expected inflation rate data, commodities’ prices spiked over rising geopolitical tensions

Weekly market update 11th February – Dollar climbed after release of higher-than-expected inflation rate data, commodities’ prices spiked over rising geopolitical tensions

1. The Dollar strengthened over the week, climbing close to the 96 level before Friday, after the release of higher-than-expected inflation rate data and further hawkish comments from a Federal Reserve official which fueled demand for the safe-haven currency. U.S. inflation hit 7.5% in January, accelerating at its quickest pace in nearly 40 years. U.S. Treasury yields also spiked in response, with the benchmark 10-year treasury yield breaking above 2% for the first time since 2019. This prompted market expectations of a more aggressive tightening of monetary policy from the Federal Reserve with such strong inflationary pressures. Additionally, St. Louis Fed president James Bullard also called for speeding up the pace of rate hikes to keep inflation in check, advocating for a full percentage point increase by July 2022. Going forward, the dollar remains on track for a bullish run, but other currencies facing similar inflationary pressures and expectations of hikes in interest rates could strengthen as well. As such, it remains to be seen whether the greenback can continue to appreciate against its peers going forward. In the coming week, Fed member James Bullard is due to speak, and investors will also be watching retail sales data for a gauge on the general market performance and FOMC meetings for any more hints of whether the Fed may employ a more aggressive tightening in response to recent events.

2. The Euro suffered the most against the strengthening of the U.S. dollar over the week, dipping to below $1.14 before the week came to a close. The recently concluded ECB press conference saw the central bank make a hawkish pivot due to increasing inflationary pressures, and money markets are still pricing in 50 basis points of rate hikes this year. The Euro could still see some downside going forward against the strengthening dollar. In the coming week, ECB President Christine Lagarde is due to speak, and investors will also watch the ZEW Economic Sentiment data release for an estimate on general market sentiment within the bloc. On the other hand, the Pound remained little changed at around $1.35 by Friday close. There is some level of uncertainty surrounding the direction for the BOE’s monetary policy. BOE Governor Andrew Bailey warned markets not to take the BOE’s rate hiking cycle for granted after the BOE revised inflation forecasts downwards. Going forward, the outlook on the Sterling remains slightly mixed, and investors would be watching the CPI data closely next week to see how it compares to inflation forecasts by the BOE.

3. Commodity currencies generally managed to outperform the U.S. dollar over the week. The Aussie hit a 3-week high of $0.725 during the week, and the Kiwi also hit similar highs of $0.673 despite the strengthening of the dollar. The Kiwi’s strength comes as New Zealand’s unemployment rate fell to an all-time low of 3.2% and inflation soared to a high of 5.9% in 2021, raising the expectations of interest rate hikes at the central bank’s next meeting on February 23rd. The Canadian dollar hovered around $1.269 against the U.S. dollar, after a crucial U.S.-Canada trade route was shut down recently. Nevertheless, the Loonie did not suffer much losses due to rising oil prices, since oil is one of the major exports from Canada. Crude oil prices continue to rise to $94 per barrel over the week, amidst the growing tensions over Russia’s possible invasion of Ukraine and the potential repercussions stemming from U.S. actions. Supply tensions had already existed within the oil market given the persistent gap between OPEC+ output and target levels, creating an upward pressure on price exacerbated by the growing geopolitical tensions. Oil prices are expected to continue rising going forward in the next few weeks. With growing geopolitical concerns creating a risk-off mood in the markets, gold prices have seen some upside over the week, rising to above $1,860 per ounce by Friday’s market close. As such, the safe-haven’s appeal in such troubling times could provide some upside to its prices in the coming weeks.