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Weekly Market Update 12 June – Weak PMI, Rising Unemployment Claims Drove Dollar Below 104

Weekly Market Update 12 June – Weak PMI, Rising Unemployment Claims Drove Dollar Below 104

1. The dollar index weakened to touch a week-low, falling below 104 to 103.3. The optimism from the debt ceiling resolution faded quickly, after weaker-than-expected services PMI data. Markets were expecting services PMI to continue expanding from the previous month’s 51.9, but it fell to 50.3, barely avoiding a contraction. Unemployment claims jumped up to 261k, the highest level since October 2021, leading to further weakness in the dollar as markets increased bets of a “hawkish pause” at this week’s FOMC meeting. Fed officials, including Chair Powell, had signalled the possibility of a rate “skip” this month before continuing hikes in July. Even though the Fed is currently in its blackout period, CPI data that’s due on Tuesday could still see dollar volatility before Wednesday’s FOMC meeting. Core CPI m/m is expected to remain unchanged at 0.4%, which if true means that core inflation has not dipped below it since January this year.

2. The euro briefly climbed above $1.0780 against the dollar last week, with ECB President Lagarde unconvinced that “underlying inflation has peaked”. Her hawkish remarks strengthen the majority view that the ECB will continue hiking rates by 25bps at this Thursday’s meeting. While markets have priced in a further rate hike in July, questions remain about whether the ECB will continue tightening in September. Latest figures released last week showed that the euro area fell into a mild recession, after it contracted by 0.1% in Q4 last year and Q1 this year. Markets will focus on the latest forecasts that the ECB will share after its rate decision. The updated CPI numbers for the euro area are also due on Friday, giving markets more data.

3. The pound sterling rallied against the dollar last week to close at a month-high of $1.2570, as markets expect continued rate hikes from the BOE. Job platform Indeed reported record wage growth of 7.2% y/y, which differed from the Recruitment and Employment Confederation’s data showing that not only did wages rise at the lowest rate in more than two years, the number of workers looking for jobs increased at the fastest rate in more than 2.5 years. Hence, this week’s unemployment claims data will shed further light on whether wage-price spiral worries are unfounded. The BOE is expected to continue hiking rates this month.

4. The loonie strengthened against the dollar, closing at $1.33, following an unexpected interest rate hike by the BOC. On Tuesday, the Ivy PMI reported lower than expected figures, indicating a slowdown in Canadian economic activity. Despite this, the BOC announced a 25bps rate hike, bringing the overnight rate to 4.75%. In May, Canada experienced a loss of 17.3K jobs, with an unemployment rate of 5.2% that exceeded market forecasts. However, experts suggest that the BOC is unlikely to interpret the labour market data as a sign of the effectiveness of its inflation-fighting rate-tightening campaign. The aussie gained strength against the dollar, closing slightly above $0.67, upon a surprise interest rate hike by the RBA. The RBA raised rates by 25bps, setting the cash rate at 4.10%. GDP growth fell short of estimates, reaching 0.2%. Employment change and unemployment rate data will provide further insights into the RBA’s future rate decisions. The kiwi also strengthened against the weakening USD, closing above $0.66, driven by a surge in ANZ Commodity prices. Although the ANZ Commodity Index gained 0.3% m/m, GDT price index decreased by 0.9%, when a no-change 0.0% was expected. However, thanks to New Zealand’s high interest rate environment, kiwi’s strength remains supported. This week, the focus will be on New Zealand’s current account and GDP q/q figures.

5. Brent crude pares initial gains to close below $75 per barrel last week, upon weak economic growth in China. On Monday, upon news of Saudi Arabia’s cut of around 9M bpd in July, prices on brent crude soared to $78 per barrel. However, the gains were quickly reversed following a slowdown in China’s trade. In May, China’s exports contracted faster than anticipated, and imports continued to decline. Furthermore, exports to most destinations contracted, with double-digit decline to places including the US, Japan, etc. This indicates a movement in purchasing preferences away from goods and towards services. Consequently, this is painting a negative picture for global demand. Meanwhile, market participants await significant upcoming events such as CPI and the FOMC meeting. Gold prices surpassed $1,960 per ounce due to the weakening US dollar. Investors are also preparing for the release of US inflation data this week, which could impact the economic outlook and interest rates. Market indicates a probability of over 70% that the Federal Reserve will maintain its benchmark interest rate on Wednesday.

Salzworth Asset Management