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Weekly Market Update 16th September – Dollar extended its rally as markets anticipate more aggressive Fed rate hikes to rein in inflation

Weekly Market Update 16th September – Dollar extended its rally as markets anticipate more aggressive Fed rate hikes to rein in inflation

1. Dollar extended its rally, supported by expectations of more aggressive Fed rate hikes going forward as price pressures showed no signs of peaking. August CPI m/m data rose by 0.1%, exceeding market expectations of a 0.1% decline while core CPI m/m data which excludes the energy and food components rose 0.6%, exceeding market forecasts of 0.3%. Meanwhile, upside surprises in retail sales and unemployment claims data also pointed to robust domestic demand and resilience in the labour market amid the macro headwinds, paving way for larger rate hikes in the FOMC meeting next week. Money markets are pricing in a 76% chance of a 75bps hike and 24% chance of a 100bps rate hike.

2. The Euro pared recent gains against the greenback, trading below parity level after hotter-than-expected US inflation data boosted a fresh Dollar rally. Hawkish stance taken by the ECB in September’s monetary policy meeting, following a 75bps rate hike while signaling higher interest rates going forward provided a temporary boost to the Euro. However, in contrast to the US facing demand-driven inflation, Eurozone’s inflation is primarily driven by higher energy prices and supply constraints where monetary policy tools by the ECB are less effective in curbing inflation and increases stagflation risks within the region. Elsewhere, Pound extended its decline against the greenback to trade at around 1.15, weighed down by uncertain economic outlook and the Dollar’s strength. Figures released this week painted a mixed picture with annual inflation easing in August but still standing at decades-high of 9.9% due to lower fuel costs, while annual core CPI data rose to a fresh record of 6.3% in August, ahead of 6.2% market estimates. Growth remains subdued as GDP data disappoint while unemployment rate dipped to 3.6%. Markets are anticipating a 75bps rate hike by the BoE on 22 September to curb inflation.

3. Commodity currencies extended their decline against the greenback, weighed down by the stronger Dollar and slowdown fears. The Australian Dollar hovered at around 0.675 as jobs data fell short of expectations but still pointed to a resilient labour market. In the coming week, traders will be keeping a close watch on RBA monetary policy meeting minutes for further clues on the extent of the rate hike, with markets anticipating a 25bps hike in October. Elsewhere, upside surprises in New Zealand’s second quarter GDP data, which recorded a 1.7% growth beating 1% growth estimates did little to stem the Kiwi’s weakness as the currency remains vulnerable to risk aversion and China’s lockdown. Signs that the RBNZ might be pausing it’s tightening cycles after rates reached a restrictive level of 4% also dampen the appeal of the currency, especially in contrast to the Fed who reiterated commitment to rein in inflation even at the expense of growth.

4. Oil prices edged lower, hovering at around $85 per barrel this week as the uncertain macroeconomic landscape continue to dampen the demand outlook. With China being the world’s largest consumer of oil, lockdown restrictions following its zero-covid policy could lead to weaker consumption and weigh on the demand outlook. Elsewhere, Gold dipped lower to reach its 2 years low of $1660 per ounce as higher interest rates prospects dampened the appeal of the non-yielding asset. We could see more downside risks ahead for the bullion as long as US inflation remains elevated which could pave way for larger rate hikes by the Fed, making Dollar a more attractive hold as compared to Gold amid the uncertainties.

Salzworth Asset Management