Weekly Market Update 17 July- Optimistic CPI Triggers Dollar Plunge, Global Currencies Soar

Weekly Market Update 17 July- Optimistic CPI Triggers Dollar Plunge, Global Currencies Soar

1. The dollar tumbled this week to a low of 99.5 as the markets anticipate the cessation of interest rate hikes by the Feds. This comes after the release of US CPI data, measuring only a 3% y/y increase in inflation levels, one of the key considerations for the Fed’s prolonged decision to embark on their hawkish policy. The drastic drop in US CPI is a stark contrast to staggering figures observed in the previous releases, with the evaporation of long positions on the Dollar simultaneously reflecting the drop of US government bond yields, which quickly corrected itself as the markets repriced the after-effects of the oversold Dollar. These effects are amplified by US PPI and unemployment claims being lower than markets’ expectation, pointing in amalgamation to the market’s consensus of a potential rate hike pause in the coming months. If anything, the fall of the Dollar overshadowed the strong consumer sentiment reported last week, which was significantly higher than forecasted levels. This week, the market looks forward to the release of month-on-month retail sales reports, which provide a glimpse into the actual current spending habits of US consumers. With its current forecast at 0.4% increase, any figures below expectations could indicate the continued onslaught of recessionary troubles, and a thereafter decline in the Dollar.

2. The Euro rose significantly last week, climbing to a high of $1.12 against the Dollar since March this year and breaking out from previous resistance levels. This comes despite the German ZEW Economic Sentiment reported at -12.2, which fell short of the market’s forecasted levels of -10.2. We anticipate greater volatility in the Euro this week as ECB President Christine Lagarde is set to deliver her speech, and the markets expect a northward climb of the Euro if a hawkish stance is assumed by Lagarde. Later this week, the ECB will release reports of their final CPI y/y levels, which is forecasted to be 5.5%. Levels above expectation will likely see the strengthening of the Euro against the greenback, as investors move towards shifting their capital to capitalise on the expected interest rate differentials between the two currencies.

3. Last week’s performance of the Pound Sterling has been nothing short of extraordinary, with the currency strengthening against the dollar to a high of $1.31. Similar to the Euro, the Sterling’s growth is likely to be reinforced by the market’s expectations of UK’s CPI release this week, with expectations to hover around 8.2%. The performance of the Sterling is enhanced by better-than-expected GDP figures, which the market hopes to benchmark as UK’s recovery in a post-Truss government. This economic optimism is fraught with a contrasted difficulty experienced by the UK to lower its inflation levels, in spite of the BoE’s persistent incessant rate hike attempts. The markets continue to speculate on the impact of the next CPI readings released this week on the BoE’s next policy decisions.

4. The Loonie exhibited strength against the dollar, concluding the week at 1.32, upon BOC’s rate hike. As forecasted, the BOC implemented the rate hike, raising overnight rate to 5.00%. As for reason behind the increase, BOC Governor Macklem cited that the consequences of postponing action outweighed the benefits of waiting. With the recent moderation in CPI y/y, coupled with the data-driven approach of BOC, the Loonie pared some of its gains against the dollar. The market is eagerly anticipating the release of CPI y/y and core retail sales data to assess the prevailing inflationary pressures. The aussie surged against the weakened US dollar, ending the week above $0.68. The NAB business confidence index reported a reading of 0, surpassing market expectations of -1. RBA Governor Lowe suggested the possibility of “further tightening” monetary policy to bring inflation back to the target range within an acceptable timeframe. This statement signals the central bank’s commitment to addressing inflationary pressures. Market participants are awaiting the release of the minutes from the recent monetary policy meeting, as well as employment data. The kiwi strengthened and concluded the week above $0.63, driven by RBNZ’s decision to maintain its cash rate on Wednesday. The RBNZ opted to keep its cash rate unchanged at 5.5%, signaling to the markets that there will be no immediate adjustments, and it will remain on hold for a considerable period. However, economists are anticipating rate cuts to occur in 2024. The RBNZ justified its decision by stating that the official cash rate has effectively curbed spending. Nevertheless, the central bank acknowledged the need to keep the rate relatively high, as inflation is projected to enter the target range only in the second half of the following year. This week, market participants will closely observe the release of the CPI q/q data, with expectations of a modest increase of 0.9%. Additionally, the market will be interested in the RBNZ’s statement of intent, which will provide further insights into the central bank’s future plans and objectives.

5. Brent crude oil surpassed $79 per barrel following projections from the U.S. Energy Information Administration (EIA). The July oil report by EIA indicated a forecasted increase in global oil output, rising from 101.1 million barrels per day (bpd) in 2023 to 102.6 million bpd in 2024. However, there is a corresponding projection for an increase in world demand, expected to grow from 101.2 million bpd to 102.8 million bpd. As a result, demand will potentially outpace the boost in supply. Consequently, the decline in Russian oil exports by 100-200K bpd in August is expected to provide support to Brent crude prices for the time being. On the other hand, the price of gold eased towards $1,950 an ounce on Monday, retracing from one-month highs, as investors continue to evaluate the outlook for US Federal Reserve monetary policy. The moderation observed within the CPI data contributed to the rise of gold, as it is often considered a safe-haven asset during uncertain economic times.

Salzworth Asset Management