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Weekly Market Update 15 May – Dollar Index Surges Above 102.5 as Investors Seek Safe Haven Amidst Debt Ceiling Concerns

Weekly Market Update 15 May – Dollar index surges above 102.5 as investors seek safe haven amidst debt ceiling concerns

1. Dollar index surges above 102.5 as investors seek safe haven amidst debt ceiling concerns. The DXY rose from 101.3 to 102.7 last week. In April, CPI y/y came in below market forecast of 5.0%, at 4.9% and the annual core rate edged lower to 5.5% as expected, supporting market’s view of a pause in future rate hikes. On Thursday, the Fed reported a budget surplus of $176.2 billion for April, down from $308.2 billion last year. With the scheduled debt ceiling meeting last Friday being cancelled and the approaching June 1st deadline, which is when the Treasury is expected to run out of cash reserves for debt payments, investors are increasingly anxious about the debt ceiling crisis. PPI m/m grew 0.2% in April 2023, below market expectations of a 0.3% gain. Initial unemployment claims soared to 264K, above 245K as forecasted. The consumer sentiment index fell to 57.7, the lowest level since November, as consumers expect 3.2% long-term inflation and increased costs in the coming year. This week, retail sales data will be released to gauge consumer demand, while unemployment claims data will offer insight into the state of the US labour market. Investors are eagerly anticipating Fed Chairman Powell’s speech on Friday, which is expected to shed light on the Fed’s future policy direction.

2. The Euro weakened against the dollar, falling to $1.09 as investors try to interpret the latest inflation reports from the US and China. Upon moderating inflation data in the US on Wednesday, the Euro pared slight losses as hopes of a smaller interest rate differential between the US and the Euro zone surfaced. However, the poor inflation data in China raised concerns about global growth, prompting some investors to seek safe-haven currencies like the greenback. Furthermore, with German and French final CPI m/m coming in at 0.4% and 0.6% respectively as forecasted, the moderated inflation within the Euro zone caused the Euro to continue its slide. Markets will be keeping a close eye on ECB President Lagarde’s speeches this week, as well as important economic indicators such as unemployment, GDP, and CPI data from the Eurozone, to gain a better understanding of the ECB’s future rate hike policy.

3. The pound sterling slid against the dollar, depreciating to $1.25. As expected, the BoE hiked its Bank Rate by 25bps to 4.5% on Thursday. Although Prelim GDP q/q came in as expected, at 0.1% for Q1 2023, GDP m/m fell by 0.3% in March, below market expectation of 0%. The BoE is no longer predicting a recession after it made the biggest improvement to its growth projections since it first published forecasts in 1997. Though, inflation will likely remain persistent due to unexpectedly big surges in food prices. The BoE remains keen on further tightening upon strong inflationary data, providing support for pound sterling against strengthening dollar. Moving forward, the BoE will keep an eye on wage growth and labour market conditions. Hence, markets can look forward to economic data like average earnings index 3m/y and claimant count change on Tuesday for updates regarding UK’s labour market. Additionally, BOE Governor Bailey is scheduled to speak on Wednesday, providing investors with insights into England’s future rate hike policies.

4. The commodity currencies declined against the US dollar due to a global shift towards the safe-haven greenback, following weak economic data from China. Loonie weakened against the dollar, with USDCAD climbing to $1.35, as risk sentiment rebounded after data showed inflationary pressure in the US cooled. This week, markets can anticipate CPI news on Tuesday and a speech by Governor Macklem on Thursday. Aussie tumbled against the dollar to trade at around $0.67. Australian retail sales fell by 0.6%, as markets forecasted, in Q1 2023 from -0.3% in Q4 2022. Retail sales declined for a second consecutive quarter, suggesting that increased living costs and rising borrowing rates are curbing consumer spending. This week, Wage Price Index q/q data and employment statistics will offer insights into service inflation in Australia. Kiwi fell below $0.62 upon lower inflation expectation q/q data. The RBNZ survey indicated that two-year inflation expectations are expected to decrease from 3.30% to 2.79%, aligning with the central bank’s target range of 1% to 3%. This provides support for a potential pause in rate hikes. This week, markets can anticipate economic data on the GDT Price Index and PPI, which will provide valuable information regarding the effects of the high interest rate environment on the agriculture sector and the overall economy.

5. Brent crude fell and closed near $74 per barrel as fears of a US economic slowdown and a slower-than-expected recovery in China weighed on the demand outlook. On Tuesday, the US EIA’s short-term outlook report indicated a downward revision in the price forecast for Brent oil, with a new projection of $79 compared to the previous estimate of $85. In contrast, OPEC’s monthly outlook report predicts a surge in crude demand, which has raised expectations of a supply deficit in the latter half of the year if the producer group adheres to its recent production cuts. This has provided support for Brent crude. Gold prices fell slightly to $2,014 per ounce, extending its decline from the near-record-high of $2,050 on May 5th as a strengthening US dollar made gold more expensive for foreign buyers, which dampened buying volumes.

Salzworth Asset Management