Weekly Market Update 11 September – Dollar Soars on Strong Economic Data; Markets Await Inflation Reports
Weekly Market Update 11 September – Dollar Soars on Strong Economic Data; Markets Await Inflation Reports
1. The dollar surged past the key level of 105 upon optimistic ISM services data and glimpse of a tighter-than-expected labour market from unemployment claims data. Prior to U.S. ISM services data on Tuesday, the dollar ballooned as capital flight to safety before eurozone services PMI figure release, which eventually revealed pessimism amidst eurozone economies. U.S. ISM data exceeded the market forecast of 52.5, coming in at 54.5. Moreover, positive unemployment claims of 216K revealed labour resilience amidst an environment characterised with high-borrowing costs. Speeches by FOMC members on Friday revealed an uptick in optimism for the U.S. economy as signs of easing price pressures and the labour market are showing itself. Politically, the FOMC members, specifically the Fed Chair Powell, may be driven to tame inflation without jeopardising the economy as it would be a rare achievement and appease the public’s criticism for not raising rates fast enough in early 2022. This week, markets await CPI, PPI to ascertain the current inflationary climate. Also, reports regarding consumer and business sentiments will be out, which will help shape the market’s understanding of U.S. economic health.
2. The euro sank against the dollar, closing below $1.07 last week, as services PMI data disappoints. On Monday, volatility for the euro picked up as ECB President Largarde gave markets no hints on their rate hike decision, which is happening on 14 September. However, gains made were pared as services PMI figures revealed a broad contraction of service activity across eurozone economies, dampening attractiveness for the euro. Furthermore, eurozone retail sales m/m fell by 0.2%, indicating weak consumer demand. Moving forward, markets anticipate refinancing rate decision this week, with markets expecting a rate pause at 4.25%. Although a rate increase would make the euro more appealing in the near term, the euro will be under pressure due to the long-term economic drag that the eurozone economies are experiencing.
3. The pound sterling extended its slide, closing below $1.25 last week, as BOE Governor Bailey reiterated that the rate hike regime is here near its peak. The BOE Governor adopts a dovish, wait-and-see stance as he believes that the UK is not in the spot where rate needs to be aggressively hiked. However, markets anticipate an increase in interest rates to 6% by the end of 2024 due to the recent increase in oil prices.Markets anticipate statistics on the labour market and GDP m/m this week to evaluate the UK’s financial situation, which is tenuously hanging on in the face of a potential mortgage crisis.
4. The yen continues to fall against the dollar to close just below 148, plagued by expanding interest rate and monetary policy differences with the rest of its G10 currency counterparts. Household spending decreased by 5%, according to economic statistics figures issued on Tuesday. Domestic consumption is likely to continue declining given the 1.3% drop in average cash earnings year over year and other factors. As such, it drives the narrative for BOJ to maintain its easy monetary policy, to prevent relapse into its deflationary environment. However, one important consideration is the possible impact that yen weakness can have on policy direction, as Ueda said in August, as it is now one of the decision-making variables for monetary policy. This week, markets await PPI data to assess inflationary conditions.
5. Over the past week, the loonie saw a downtrend against the dollar. However, it rebounded, buoyed by economic indicators that outperformed forecasts, settling at 1.36 by week’s end. Key metrics driving this resurgence included an employment shift that more than doubled projections and an unemployment rate that came in below expectations. This positive momentum was further influenced by BoC governor Macklem’s announcement on retaining the overnight rate, hinting at potential accelerated rate cuts in the near future. The aussie faced headwinds last week, closing below $0.64 against the dollar, primarily driven by unforeseen economic data that weighed it down. Early in the week, corporate operating profits, which came in notably below expectations, spotlighted the declining profit landscape in Australia. Coupled with a reduced current account and trade balance from the prior period, the currency saw a dip of nearly 1.89% from its weekly peak. This week, market watchers are keenly awaiting data on unemployment rates and employment changes as the week progresses. The kiwi’s trajectory over the past week was largely influenced by movements in other major currencies. It gained momentum towards the week’s close, fueled by robust manufacturing sales from the previous quarter and ending the week below $0.59 . This week, with the market’s attention diverted by low-impact news, the spotlight has shifted away from the kiwi to other currencies.
6. With the dollar gaining ground over the previous week, gold faced a sharper decline, settling at $1918 by week’s end. This downturn was influenced by a rise in the ISM Services PMI, a drop in unemployment claims, and notably reduced crude oil inventories, all of which highlighted a renewed confidence in the US economy. This optimism prompted a shift away from gold, leading to a nearly 1.57% drop in its price. As we move into this week, the market’s perception of gold as a refuge will be challenged, especially with the impending release of crucial US economic indicators. These will determine if gold’s downward trend persists in the face of a resurgent US dollar.
