Weekly market update 14 January – Dollar suffered significant weekly losses, commodity currencies and oil prices saw gains after Fed chair Powell’s testimony.
Weekly market update 14th January – Dollar suffered significant weekly losses, commodity currencies and oil prices saw gains after Fed chair Powell’s testimony.
1. The Dollar suffered its biggest weekly loss in nearly eight months as it dipped to around 95 at the end of the week as investors began to unwind hawkish bets on the outlook of how interest rates may change in the coming months. Although the general consensus is that the U.S. Federal Reserve will hike rates three times this year, there are signs that the Fed may have to be more cautious. Latest data showed that retail sales unexpectedly declined by 1.9%, while industrial production in the U.S. saw a drop by 0.1% as opposed to market expectations of a 0.3% rise. Consumer sentiment also worsened in early January to its second-lowest level in the past 10 years, well below market expectations, indicating that markets may not be as optimistic about economic recovery as previously thought. Federal Reserve chair Jerome Powell also dashed expectations of more aggressive tightening of monetary policy in his Congressional testimony earlier last week. U.S. stocks were mixed. The S&P 500 was 0.1%, but the Dow Jones lost around 200 points, mostly weighed down by bank shares, where mixed earnings reports were posted by major banks in the U.S. Going forward, investors will be looking out for unemployment claims, existing home sales and the Philly Fed manufacturing index, for a better grasp of how economic recovery may progress, and how the Fed may adapt its monetary policy accordingly.
2. The Euro outperformed the Dollar and hit its highest level since mid-November 2021. This comes mostly amidst the weakening of the greenback over the week. Industrial production in the Eurozone climbed 2.3% last month, rebounding from three consecutive months of contraction and beating market expectations of 0.5% growth. However, moving forward, the ECB is not expected to change its much slower timeline of tightening monetary policy. In the coming week, ZEW economic sentiment survey is expected to reveal the general economic outlook. Similarly, the Pound also strengthened and outperformed the greenback, holding above $1.37 in mid-January which is its strongest level since October 2021. The Sterling is supported by strong GDP numbers in November and expectations of interest rate hikes by the Bank of England in February to tame inflation. Fears over the adverse impact of the Omicron variant on the British economy also eased. Moving forward, investors will be looking out for CPI data over the past year to have a better idea of inflationary pressures in the British economy. BOE Governor Bailey is also expected to testify before the Treasury Select Committee as well.
3. Commodity currencies also outperformed the Dollar over the week. Both the Aussie and the Kiwi gained 0.7% over the week. The Reserve Bank of Australia is not expected to hike rates until 2023, but the Reserve Bank of New Zealand is expected to tighten monetary policy further given a milder than expected third quarter economic contraction in New Zealand. The Canadian dollar also traded at its highest level since November 2021, amid a weaker U.S. dollar and higher oil prices, which stayed above $82 per barrel. WTI crude futures rose more than 2% in its fourth consecutive week of gains, amid supply disruptions in Libya and Kazakhstan and dwindling U.S. crude inventories. Gold, however, traded below $1,820 an ounce at the end of last week. Nevertheless, the bullion was on track for its best week since mid-November after Fed chair Jerome Powell dashed expectations of aggressive tightening in his Congressional testimony earlier this week. However, given expectations of upcoming rate hikes by the U.S. Federal Reserve, gold prices could suffer as the opportunity costs of holding a non-yielding asset like gold become higher with higher interest rates.