Weekly Market Update 16 December – Dollar Plummeted after lower than expected inflation results and edged lower to 104.8 by the week’s end

Weekly Market Update 16 December – Dollar Plummeted after lower than expected inflation results and edged lower to 104.8 by the week’s end

1. Dollar plummeted on Tuesday after lower than expected US inflation results but pared losses to end the week just slightly lower at around 104.8, extending the Greenback’s bearish decline since September this year. On Tuesday, m/m CPI of 0.1% came in much lower than the expected 0.3%. This was the same for y/y CPI and m/m Core CPI of 7.1% and 0.2%, which defied market expectations of 7.3% and 0.3% respectively. This clearly took investors by surprise following higher than expected PPI data released just last week, and could be seen in the sudden dip in the Greenback from around 104.8 to 103.8 as a downgrade in the outlook on Fed rate hikes became priced into the market. Price hovered around this region until Thursday when a slight uptick in the Dollar could be seen in anticipation of a Fed rate hike the same day, before correcting short lived gains when the FOMC announcement of a 50 bps rate hike to 4.50% came perfectly in line with most expectations and wiped out investors who had bet on maintaining the previous 75 bps rate hike. However, Dollar experienced a sharp bullish ascent during the FOMC press statement which came just shortly after the rate hike announcement, where FOMC members reiterated their commitment to bringing inflation back down to their 2% target and for more rate hikes to come in 2023. Dollar began to lose some steam from the initial burst of optimism after poorer than expected economic data was released the same afternoon. Change in core retail sales of -0.2 was worse than expectations of 0.2%, representing the first dip into a contractionary zone since September and only the second time since the start of this year. Although unemployment claims of 211K released at the same time was at a fairly healthy level, it is a lagging indicator and a poor predictor of future economic conditions. On Friday, worsening Flash PMI data seemed to confirm our initial hypothesis of a slowing economy. Both Flash Services and Manufacturing PMI extended their declining trend, coming in worse than market expectations at 44.4 and 46.2 respectively, which depressed the Dollar that day before gradually recovering. Goldman Sachs forecasts a 35% probability of a US recession in 2023, which is divergent from the median of 65% among forecasters in a Wall Street Journal survey. The split in expectations has created significant uncertainty over the prospect of a US recession. Investors should pay close attention to q/q GDP results in the coming week which had been contractionary the previous 2 quarters, and will undoubtedly move the needle on the US economic outlook. A further contraction in GDP could see the Dollar extending its bearish trajectory. Another indicator to look out for is the Core PCE Price Index due for release on Friday, which could either confirm the results of this week’s soft CPI data, or result in a bullish price correction in the Greenback if the index is higher than expected. 

2. Euro edged higher across the week to close at around 1.06, on the back of a weakening Dollar. On Tuesday, softer than expected US inflation data caused the Dollar to plummet, resulting in a sharp bullish spike in the Euro. Instead of retracing after such a rapid ascent, Euro was supported by fundamentals and continued to be bullish across the next day. Although German ZEW economic sentiment was still negative reflecting an overall pessimistic outlook, this month’s rating of -23.3 was better than expectations of -26.5, representing the third straight month of improving sentiment and creating optimism on the outlook of European economic recovery. On Thursday the ECB announced a hike in its main refinancing rate of 50 bps to 2%, which was in line with long held market expectations but smaller than its previous hike of 75 bps. Despite this, ECB members warned that the softer rate hike this time should not be taken as a pivot in its overall monetary policy. It expects to continue raising interest rates “significantly” and for much longer at a “steady pace” until its 2% target for inflation is reached. The prospect of a European economic recovery was further boosted on Friday on the back of generally optimistic PMI results. German Flash services and manufacturing PMI was better than expected at 49.0 and 47.4 respectively. Similarly, French Flash Manufacturing PMI of 48.9 was better than expectations, but only Flash Services PMI of 48.1 was marginally worse than expectations of 49.1. With the ECB reaffirming its strong stance on further interest rate hikes in the long run, and an improving outlook on the European economy amidst a bearish Dollar, investors can expect further bullish price action in the Euro. 

3. Meanwhile, the Pound edged lower to end the week at around 1.21 against the Dollar after a tumble on Thursday wiped out any gains it made over the week. Pound started off on a strong footing when m/m GDP growth of 0.5% was higher than market expectations of 0.4%, representing a turnaround after dipping into a contractionary zone last month. However, the Pound really took off on Tuesday similar to the Euro when the Dollar took a dip on the news of weak inflation data. The initial spike in price was corrected by an immediate retracement on the back of significantly higher than expected unemployment claims of 30.5K, nearly ten times higher than market expectations. The Pound was further weighed down on Thursday when CPI data of 10.7% came in lower than expectations of 10.9%. A 50 bps rate hike announced by the BoE did little to save the Pound from a bullish Dollar that day which saw prices plummet below the starting price of the week. Although the Euro experienced a similar dip, the Pound fared worse after BoE Deputy Governor Dave Ramsden became the latest to join a chorus of members this month who have cautioned against over tightening.  Ramsden said that he would consider cutting rates if the economy and inflation pressures panned out differently to his expectation, following statements from the BoE earlier this month that market expectations for interest rates over 5% were too high. Investors took note of the BoE’s contrasting stance with the hawkish Fed which also hiked rates the same day, and followed suit by dumping the Pound for the Dollar. On Friday the Pound continued to edge lower as the Dollar edged higher, weighed down by worse than expected retail sales data of -0.4% and Flash Manufacturing PMI of 44.7. However, the recent dip in the Pound may form part of a timely retracement, and we could see price rebound again in the following week on the back of a strong overall bullish trend since September. 

4. Commodity currencies were likewise also affected by swings in the Dollar, and ended the week lower. While Loonie, Aussie and Kiwi edged higher across the week, a significant dip on Thursday following a hike in the Fed funds rate led them to close to week at 0.729, 0.668 and 0.637 respectively. While Loonie continued to edge lower following the dip, and Aussie and Kiwi pared some losses on the back of upbeat economic data. New Zealand experienced a q/q GDP growth rate of 2.0%, which was significantly better than expectations of 0.8%. Meanwhile employment growth in Australia of 64K was significantly higher than expectations of 19.4K. Meanwhile its unemployment rate managed to maintain last month’s historic low of 3.4%. Australia’s recent employment data indicates that it continues to face a tightening labour market, which is currently the leading cause of inflation in the country. The RBA’s monetary policy meeting minutes are due on 20 December, and could confirm that the central bank’s view on inflation is aligned with the current reality of overemployment driven inflation. 

5. Brent Crude pared recent losses to end the week higher at around $79.4 per barrel. From Monday through Thursday, prices edged higher on the back of a weak Dollar after softer than expected inflation results were released. The dip in the Greenback lowered the costs of oil in foreign currencies, providing a temporary boost in prices. However on Friday, price fell by over $2 per barrel, representing a 2.7% dip to $79.04 a barrel. The BoE, ECB and Fed all announced another round of fresh rate hikes this week, and reiterated their stance on further rate hikes to come. The hawkish central banks sparked fears that a tightening monetary policy could increase the probability of a global recession, with the Dow, S&P 500 and Nasdaq Composite ending Friday 0.9%, 1.1% and 1% lower respectively, confirming a marked shift to a risk-off sentiment. Increased fears of an anticipated drop in consumption demand and economic activity resulted in a steep drop in oil demand. While some optimism came from the International Energy Agency’s projection on Chinese oil demand recovering in 2023, this was largely overshadowed by economic woes and slow pace of recovery as severe outbreaks of the virus unravel across the country.