Weekly market update 13th May – Dollar showed no signs of stopping, buoyed by prospects of higher interest rates amid an uncertain global outlook

Weekly market update 13th May – Dollar showed no signs of stopping, buoyed by prospects of higher interest rates amid an uncertain global outlook

1. The Dollar index rose above 104, reaching near its two decades high following higher-than-expected US inflation data. The headline CPI in April in the United States remained elevated but eased off a 40-year high of 8.3%, while the core CPI was also above expectations at 6.2 percent. The figures suggested that inflation had peaked, but that it was unlikely to decline quickly, which bolstered bets on faster Fed tightening ahead. According to the CME FedWatch Tool, markets are pricing in at least a half-percentage-point rate hike at each of the next two Fed meetings in June and July. Meanwhile, with Russia’s war in Ukraine and China’s Covid-induced lockdowns clouding the market outlook, the Dollar could continue to benefit from the safe haven flow going forward. On the data front, retail sales are projected to indicate an increase in consumer spending in April, while the Manufacturing Index and NAHB Housing Market Index are likely to reflect a slowdown in the industrial sector and housing market.

2. Euro extended its decline against the greenback to hit a new 5-year low of $1.035. The currency had borne the brunt of the hostilities in Ukraine which worsened the energy crisis, soaring inflation and slow growth in the region. Meanwhile, a higher-than-expected increase in US inflation fueled expectations for more aggressive moves by the Fed to rein in inflation as compared to other major central banks. Investors expect the ECB to raise rates by 25 basis points in both July and September, with another hike at the end of the year. Notable publications for the coming week include Eurozone’s second estimates for GDP growth, final CPI statistics, consumer confidence, and trade data as a gauge of how the region is faring amid the global uncertainty.

3. Sterling extended its decline to below $1.22, amid the dollar strength and risk aversion. On the data front, the British economy increased at a slower-than-expected 0.8 percent in Q1 and contracted 0.1 percent in March alone, while the Bank of England forecasts the economy to stagnate in Q2 and shrink in Q4. As compared to the Fed, BoE is also seen to have less room to tighten. On the data front, investors will be keeping a close watch on the consumer inflation data which is likely to have reached 9.1 percent last month, the highest pace since at least 1991. Meanwhile, the unemployment rate is expected to stay stable at 3-year lows of 3.8 percent while pay growth is expected to remain high, reflecting a squeeze in consumers’ living standard. Traders will also be keeping their eyes peeled for the Bank of England’s Monetary Policy Report meeting in front of the Treasury Committee on Monday.

4. The Australian dollar fell to its lowest level in nearly two years, as fears of a global economic downturn weighed on commodity-linked currencies, while higher-than-expected US inflation data bolstered bets on faster Fed tightening. Despite a surprisingly hawkish shift from the Reserve Bank of Australia, which started its cycle of interest rate hikes with a larger-than-expected 25 basis-point raise at the start of May, downside risks in commodity currencies continue to dominate in the short term as events in Europe and China continue to roil global markets. On the data front, Australia’s unemployment rate is expected to fall to a new low of 3.9 percent in April. The country will have federal elections, in which Australia’s Labor Party is projected to secure a majority, according to recent polls. Like its counterpart, the New Zealand dollar plummeted to its lowest level in nearly two years while the Loonie was trading at approximately 1.3 against the greenback, its lowest level since November 2020, amid the widespread dollar strength. In Canada, the Bank of Canada is anticipated to maintain its hawkish posture, as the labour market tightens with unemployment at a historic low of 5.2 percent in April and annual inflation hit a 31-year high of 6.7 percent in March.

5. Despite lingering worries of a European embargo on Russian oil, crude oil soared to a 7-week high of 111.47 USD/Bbl, extending gains from the previous week, with Kyiv reportedly pressing the EU to impose oil sanctions on Moscow. Meanwhile, OPEC forecast in its monthly report that global demand will decline to 1.9 million barrels per day in Q2 while Shanghai prepares to reopen its economy following weeks of lockdown. Gold, on the other hand, traded at three-month lows of $1,810 an ounce as a strengthening dollar sapped demand for dollar-denominated asset.

Salzworth Asset Management