13 aug 2021

Weekly Market Update 13 August – Dollar underperformed against its peers, RBNZ’s interest rates decision in focus next week

Weekly Market Update 13 August – Dollar underperformed against its peers, RBNZ’s interest rates decision in focus next week

1. The US Dollar underperformed against its G7 peers, with traders still looking towards the Federal Reserve for further direction on monetary stimulus going forward. July’s consumer price index (CPI) held at 5.4%, which is still well above the Federal Reserve’s 2% target, indicating that inflation fever has yet to subside in the U.S even though the monthly rate came down to 0.5% from 0.9% in June. This comes amid growing COVID-19 related concerns, as the fast-spreading Delta variant continues to push infection rates higher. However, the U.S. job market showed encouraging signs of recovery as jobless claims dropped for the third week in a row. First-time application for claims, fell to 375,000, below the revised 387,000 in the prior week, as reported by the Labor Department last Thursday. Though several Fed officials have shown support for tapering bond-buying, investors remain cautious as rising COVID-19 infection rates threaten economic growth, possibly limiting the upside for the Dollar. Going forward, investors will be keeping a look out for the monthly retail sales data for July, which would give an idea of how consumer spending in the U.S. is faring during these trying times. Additionally, the Fed will be releasing FOMC minutes, and Fed Chair Jerome Powell is due to speak next Tuesday as well.

2. The Euro pared recent losses, edging higher through the week after the recent inflation data from the US suggested that rising inflationary pressures could be transitory, removing some pressure from the Fed to act. Looking ahead, Euro could see a limited upside, as the ECB remains firm in its dovish stance, with ECB President Christine Lagarde warning of the economic impact that a fresh wave of COVID-19 infections from the Delta variant could cause. This could see the ECB push back the interest rate hikes to at least 2023. Looking ahead, on the data front, notable publications include GDP and CPI data, where better than expected figures could provide a short-term boost to the Euro. Elsewhere, the Sterling traded around $1.38 in the second week of August, hovering around its weakest level since the end of July. GDP released last week Thursday showed a 22.2 percent year-on-year growth in the second quarter of 2021, which is the fastest pace of expansion on record and slightly exceeding market expectations of 22.1%. Going forward, investors will be keeping a close watch on the Consumer Price Index and Producer Price Index releasing on August 16th for hints to any shifts in BoE’s stance, following in the footsteps of Fed in June, where we saw a sudden hawkish pivot with expectations of tapering at the end of 2022 or early 2023.

3. The Aussie remains under pressure as Sydney continues to tighten lockdown restrictions, with coronavirus cases hovering near record highs despite a 7-week lockdown. Meanwhile, the RBA will be releasing policy meeting minutes in the coming week. Elsewhere, oil traded at around $68-$70 a barrel as demand fell due to the increase in the spread of the coronavirus Delta variant while tensions between UAE and OPEC simmered after reaching a compromise to unlock more oil supply. Investors will also be keeping a close watch on RBNZ interest rates decisions in the coming week.

Salzworth Asset Management