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Weekly Market Update 12th August – Dollar declined, weighed down by recessionary fears and expectations of a less hawkish Fed

Weekly Market Update 12th August – Dollar declined, weighed down by recessionary fears and expectations of a less hawkish Fed

1. Poorer than expected CPI data for July pointed to easing price pressures and expectations of a less hawkish Fed, causing the US Dollar index to decline to 105.6 on Friday after hitting a 6 week low of almost 104.6 during the week. Both headline and core CPI for July were 0.2% lower than expected, released at 0% and 0.3% month on month respectively, resulting in expected inflation falling to 8.5% from 9.1% year on year. Market outlook was weighed down by the initial jobless claims rising to 262k, the highest since November 2021. However, the release of the University of Michigan Sentiment Index that indicated an improvement to 55.1 in July added on to a positive outlook for the future, with falling gasoline prices providing some relief to the high cost of living and rapid inflation. Market expectations have made a turn, with many expecting a policy rate hike of 50 bps instead of the original 75 bps for the next FOMC meeting on 21 September. FOMC meeting minutes and Retail Sales data released in the coming week, together with the subsequent jobs report and CPI data will be vital in determining if the Feds will remain with their hawkish stance, or reduce the aggressive tightening cycles.

2. Euro rallied against the Dollar, hitting a 5 week high of $1.037 and ending the week close to $1.025 buoyed by the weakening Dollar. Eurozone production outlook remains gloomy with weakening demand due to recessionary fears and unresolved supply chain issues, coupled with the soaring energy prices. In the coming week, notable publications include CPI and Trade Balance data, as well as Flash Employment and GDP numbers. Meanwhile, the British Pound dipped against the greenback after the Bank of England hiked its interest rate by 50 bps, raising its policy rate to 1.75% in line with market expectations. Despite the released GDP data beating expectations, BoE forecasts a 7 quarter recession from Q4 2022 onwards and is expecting inflation to peak above 13% while staying elevated throughout 2023. Markets are still anticipating BoE to continue on its hawkish path with a 50 bps hike in September. Investors will be looking out for the release of Retail Sales, CPI and unemployment data in the next week.

3. Commodity currencies generally did well this week, supported by the weakening greenback. The Australian Dollar extended its rally to reach a 2 month high of $0.71, buoyed by the effect of their interest rate hike for the fourth consecutive month. In the coming week, investors will be watching out for the release of unemployment data and wage price index. Similarly, the Kiwi reached a 2 month high of $0.646 with the rise in the Business PMI reading to 52.7 from June’s reading of 50, well above the expected 49.2, signalling resilience in the economy amid higher interest rates. The RBNZ is anticipated to raise the Official Cash Rate by 50 bps in the meeting next week, which could support the Kiwi’s recent rally. The Loonie reached $0.785, a 2 month high as well, supported by the rise in forecasted oil demand growth by the International Energy Agency. Notable publications in the coming week include Retail Sales and CPI data.

4. Brent Crude Oil rose slightly, ending the week at the $98 per barrel level as investors continue to assess the demand for oil amidst the economic slowdown. A global switch from natural gas to oil due to ongoing supply issues and soaring prices could provide a boost to oil prices although the outlook remains bleak, weighed down by growth concerns. OPEC lowered their forecasted oil demand this year, with oil demand forecasted to rise by 3.1 million bpd, down 260,000 bpd from it previous forecast. Meanwhile, gold extended its rally for the fourth consecutive week to the $1807 level on the back of the recent Dollar’s weakness. Looking ahead, we could see further downside risks for gold prices, with market sentiments confident of further appreciation in the US Dollar, weighing down on the dollar-denominated asset. On the other hand, the rise in geopolitical tensions between US and China have increased demand for this safe-haven asset.

Salzworth Asset Management