Weekly Market Update 16 January – Dollar plummets to a low of 102 on speculation of a smaller rate hike by the Fed as inflation data eases

Weekly Market Update 16 January – Dollar plummets to a low of 102 on speculation of a smaller rate hike by the Fed as inflation data eases

1. Dollar closed at another low of 102 on Friday, after data showed a continued ease in inflation. The m/m CPI for December entered negative territory for the first time since June 2020, coming in at -0.1%, in line with market expectations. Fed officials also signalled a willingness to implement smaller rate hikes, increasing selling pressure on the greenback. However, core CPI–which excludes volatile food and energy prices, remained positive at 0.3% as predicted by market watchers. The labour market remained tighter than expected, with unemployment claims clocking in at 205k, almost unchanged from 5 January’s 204k and still below market expectations of 216k. While markets are now anticipating a downshift to a 25 basis points hike at the next FOMC meeting in February, there is little indication that the Fed will shift from its target terminal rate of above 5%. Fed chair Powell reaffirmed the importance of monetary policy independence and the Fed’s commitment to price stability last Tuesday, which remains some time away as the y/y CPI of 6.5% remains more than triple the stated goal of 2%. Nevertheless, smaller rate hikes and an eventual soft landing could strengthen risk-on sentiments to weigh on the Dollar in the year ahead.

2. Euro rose to a high of $1.08 last seen in April 2022, as the dollar weakened on news that inflation was slowing. In the Eurozone itself, producers and the service sector reported increased confidence about the market outlook. Producers’ confidence rose for the first time since June last year, from -1.9 to -1.2 this month. As for the services industry, confidence rose from 3.1 to 6.3 this month, beating a forecasted 3.5. These factors give support to the continued hawkish stance taken by ECB governing council members. Additionally, the just-released unemployment rate for November 2022 remained at the record low of 6.5%, and the number of jobless fell, giving evidence that the labour market remains tight, there are expectations for the ECB to continue with their planned rate hikes in February. ECB president Lagarde is due to speak at the World Economic Forum in Davos this week, where she might provide guidance on the direction of future rate hikes.

3. Sterling extended its rally to trade above $1.22 on the back of a weakening Dollar and strong domestic growth as the UK economy exceeded expectations by growing 0.1% instead of declining 0.2%. The growth was mainly caused by the services industry, which expanded by 0.4%, while manufacturing shrunk by 0.2% and construction was unchanged. Despite the lingering threat of recession, BoE Chief Economist Pill sounded caution about the inflationary aspect of a strong labour market, especially when retail figures continued to post below inflation. While the BoE remains on track to raise interest rates in February, this week’s y/y CPI release could influence the BoE’s hawkish stance.

4. For the commodity currencies, the Loonie and Aussie rallied on the back of the weak Dollar, with USD/CAD and AUD/USD trading below $1.34 and above $0.69 respectively. Traders found encouraging signs of a strong Canadian economy, with increased demand from China’s reopening and a boom in the value of building permits. Jumping 14.1% from the previous month to hit $11 billion in November, the building permits exceeded forecasts of a 0.4% growth. Adding to previous strong employment data, markets expect continued hawkishness from BoC officials, which might continue when CPI is released this Tuesday. The Aussie gained on news of rising inflation and higher-than-expected retail sales. Retail sales jumped from 0.4% in October to 1.4% in November, much higher than market forecasts of 0.6%. CPI also increased to 7.3% y/y in November, rising to match the record set in September. Meanwhile, Kiwi Dollar rallied above $0.64, supported by demand from China’s reopening and the RBNZ’s hawkish stance. This Tuesday will also see the release of China’s GDP data, which would affect the trajectory of these currencies.

5. Gold extended its rally to touch $1920 per ounce on speculation of a smaller rate hike of 25 basis points by the Fed next month as US inflation eases. However, Fed officials remain committed to price stability, which would continue to limit the upside of gold in the short-term. Brent crude oil prices rallied last week to reach $85 per barrel, as the greenback softened and made the dollar-denominated commodity cheaper for foreign buyers. Demand for oil is also expected to rise, with China’s usage increasing after a reversal of its zero-Covid policy. Supply of oil continues to be limited as the EU’s sanctions on Russian oil take effect next month, while OPEC continues to export only 2 million barrels daily.