Weekly Market Update 13 February – Dollar ranges as traders await this week’s CPI data
Weekly Market Update 13 February – Dollar ranges as traders await this week’s CPI data
1. The dollar index hovered around 103 last week, as traders waited for Tuesday’s US inflation numbers. Fed Chair Powell sounded more dovish than expected at a speech last week, when reiterating that the disinflationary process had begun. However, he couched his remarks with a caveat that further rate hikes, maybe even an increase in the peak terminal rate, are in store if the labour market remains tight, or if disinflation continues to elude the services sector. Throughout the week, four Fed officials struck a hawkish tone when speaking separately about the Fed’s resolve to bring inflation back to 2%, with further rate hikes on the cards. Despite unemployment claims rising to 196k above market expectations of 190k, all eyes are on the core m/m CPI, due this Tuesday. Also due are producer prices and retail sales numbers.
2. Euro edged lower to end the week below $1.07 against the dollar, as retail numbers dropped 2.7% m/m for December 2022. This decline was the largest in 20 months, on the back of November’s 1.2% rise. Markets were anticipating a smaller drop of 2.5%, showing that inflation and higher interest rates were starting to impact consumer expenditure. Regardless, Germany’s federal reserve Bundesbank President and ECB member Nagel called for continued rate hikes to ensure inflation expectations remain at 2%. ECB board member Schnabel also remarked that broad disinflation is yet to appear, meaning that the ECB must persist with rate hikes. For further direction on the ECB’s position, traders are looking to ECB President Lagarde’s appearance before the European Parliament on Wednesday.
3. The sterling pulled back from a one-month low of $1.19 against the dollar to end the week flat at $1.20. Not only did the economy stall in the last quarter of 2022, it shrank m/m by 0.5% in December, worse than market expectations of a 0.3% decline. Markets expect the BoE to be more dovish than the Fed and the ECB, which might weigh on the pound in the short-term. The BoE expects inflation to have peaked, with a recession sometime this year. Crucial data on employment, the y/y CPI, and retail sales are expected this week.
4. In the commodity currencies, USD/CAD pared gains to reach $1.33, as the Canadian economy returned robust employment data. Employment grew by 150k, 10 times more than the expected 15k, giving the BoC reason for more rate hikes after it was assumed that they were nearing the end of their tightening cycle. Unemployment also remained steady at 5.0%, below market expectations of 5.1%, indicating a still-tight labour market. The Aussie closed the week flat at $0.69 against the dollar, as investors considered mixed news. The RBA hiked rates by a widely-expected 25bps, while hinting at “further increases” to bring inflation back down to its 2% target. The RBA also pencilled in a new, higher inflation rate of 6.25%, while expecting salary growth to hit a high of 4.25%. Despite these hawkish pronouncements, the Aussie continues to be weighed down by Fed officials’ commitment to beating inflation. This Thursday will see Australian employment data released. Elsewhere, NZD/USD ranged around $0.63, due to the lack of notable news releases last week. The RBNZ will be releasing q/q inflation expectations on Tuesday, which could indicate if more needs to be done to tackle inflation.
5. Brent crude rallied to reach highs of $86 per barrel, on news that Russia is reducing its output by 5% in March. This move is in response to a European ban on certain Russian exports. Saudi Arabia also raised prices of oil for Asian clients, the last time being 6 months ago, indicating that demand for oil is expected to rise partly from the Chinese economy’s reopening. Gold pared gains to end the week flat at $1863 per ounce, as investors await inflation data in the US. The Fed is expected to continue hiking interest rates if inflation remains stubbornly high, with markets now pricing in a peak terminal rate of 5.19% in July. A hawkish Fed could see further downside to the price of gold in the short-term.
