Weekly market update 11th June – Dollar extended its rally as higher inflation could trigger more aggressive moves by the Fed

Weekly market update 11th June – Dollar extended its rally as higher inflation could trigger more aggressive moves by the Fed

1. The Dollar index rose by 1.15% to break above 104 on Friday, extending its gains from the previous week. It experienced a week-to-week gain of 2%, riding on bets of further interest rate hikes as May US inflation rate unexpectedly surged to 8.6% year on year, ahead of market expectations of 8.3%. Looking ahead, the Dollar’s strength could remain supported as investors anticipate the Fed to maintain its hawkish stance to rein in inflation in the upcoming FOMC meeting on Wednesday. Markets are preparing for a raise in the Fed funds target rate by half a percentage point in the coming week as well as in July. On the other hand, preliminary data for UoM consumer sentiment dipped to a record low of 50.3 from 58.4 as higher oil prices and inflation weighed on sentiment. Meanwhile, only 30.8% of households had a positive outlook on income growth outperforming inflation in the next 5 years, reflecting the poor equity market performance year to date. Going forward, investors will be looking out for the FOMC meeting as well as US retail sales and unemployment claims data as a gauge of how the domestic economy and labour market are doing amid record-high inflation.

2. Euro traded at a 2 week low level, hovering below 1.06, despite the hawkish stance by the ECB since late April. ECB President Largarde announced that ECB would continue tightening its monetary supply, raising key interest rates by 25 basis points in July, and possibly a 50 basis points in September to bring inflation back to its 2% target in the medium term. However, any boost to the Euro from this announcement was short-lived, as the currency remains vulnerable to poor market sentiments. Similarly, the British Pound experienced a short-lived rally with the poor market outlook and political worries weighing on market risk sentiment. Over the week, Sterling extended its decline to a near 3 week low against the greenback, to around $1.24 on Friday. The Bank of England also announced plans to tighten its policies by 175 basis points further by the end of the year. In the coming week, investors will be keeping a close watch on the BoE monetary policy meeting in anticipation of a 25 bps hike.

3. Commodity currencies generally underperformed this week. The Australian dollar depreciated against the strong US Dollar to below $0.71 on Friday, despite the RBA delivering a hawkish rate hike of 50 basis points on Tuesday. The central bank also highlighted that near term inflation could increase further, driven by rising energy prices but is expected to decline back towards the 2-3 percent range next year. In the coming week, investors will be looking out for employment data as a gauge on the health of the labour market. Similarly, Loonie retreated from a 7 week high against the greenback, trading below 0.79 on Friday. On the data front, the unemployment rate in Canada declined to 5.1 percent in May, down from 5.2 percent in April which showed the labour market remained resilient and the ongoing expansion could pressure the BOC for further tightening ahead. Both the Bank of Canada and the Reserve Bank of New Zealand have expressed sentiments of tightening their monetary policy further to curb inflation.

4. Unlike previous weeks, WTI crude futures fell below $120 per barrel on Friday after Shanghai went back into lockdown again due to the rising number of COVID-19 cases. Meanwhile, economic growth and global inflation concerns are also weighing on oil prices, following a sharp increase in US inflation data last week, which could trigger more aggressive moves by the Fed, leading to a stronger Dollar. On the other hand, gold prices held its gains against the greenback as the bullion benefited from rising demand for safe-haven assets and hedges against inflation and uncertainties. Gold prices are expected to remain stable between the $1800 – $1900 range in the medium term.