Weekly Market Update 17th July – Dollar maintained its strength buoyed by recession fears and prospects of higher interest rates
Weekly Market Update 17th July – Dollar maintained its strength buoyed by recession fears and prospects of higher interest rates
1. The Dollar index rallied to a fresh 20-year highs of 109 on Friday, as recession fears, safe-haven inflows and prospects of higher interest rates continue to buoy demand for the greenback. US annual inflation rate climbed to 9.1% in June 2022, ahead of market estimates of 8.8%, stoking bets of faster and larger Fed rate hikes ahead to rein in inflation. Meanwhile, US Retail Sales data pointed to robust consumer spending, with a 1% increase in June, above expectations of a 0.8 % increase. In the coming week, investors will be keeping a close watch on the corporate earnings results, Flash PMIs and housing data for more insights on how companies and the housing markets are doing amid higher interest rates.
2. Slowdown concerns and a wider gap between the ECB and the Fed left the Euro battered near its 20-year lows of $1.0006 as it tried to maintain parity with the dollar. Supply-driven inflation and soaring energy prices could further weigh on the region’s growth and strengthen the stagflationary forces currently at play, putting the ECB in a bind when it comes to raising rates to stem inflation. In the coming week, the spotlight will be on Thursday’s ECB monetary policy decision with expectations of a 25 bps hike alongside a slew of PMI figures, and June’s inflation rate which is likely to stand at a new record of 8.6%. Elsewhere, the British Pound sank below $1.18, its lowest level in more than two years weighed down by political uncertainty and entrenched inflation. The UK’s ruling Conservative Party began its search for the next prime minister and six candidates are currently in the running. In the coming week, investors will turn their attention to UK’s CPI data which should accelerate 9.2% yoy in June and retail sales are seen falling for the second consecutive month while unemployment rate is expected to remain at 3.8%.
3. Commodity currencies extended their decline against the greenback, weighed down by recession fears and a stronger Dollar. Robust jobs report in Australia signalled a tight labour market and economic resilience to rising interest rates which could pave way for more aggressive rate hikes by the RBA to curb inflation. The recent data showed Australian employment surged 88,400 in June, surpassing forecasts of a 30,000 increase, while the unemployment rate dived to a 48-year low of 3.5%. In the coming week, notable publications include RBA’s monetary policy meeting minutes for more insights on the central bank’s moves ahead. On the other hand, the Reserve Bank of New Zealand increased its cash rate by 50 basis points to 2.5 percent, a move that was widely anticipated, and the New Zealand currency held stable around $0.612. RBNZ announced that it would “continue to tighten monetary conditions at pace to ensure price stability and support maximum sustainable employment” after that sixth consecutive rate increase, with another 50 bps rate hike also anticipated by economists for August. Higher-than-expected inflation data could also underpin more aggressive hikes as New Zealand’s inflation accelerated to 7.3% from 6.9% in the first quarter, ahead of 7.1% forecast while consumer prices advanced 1.7% from three months earlier, exceeding the 1.5% median estimate.
4. Elsewhere, Loonie depreciated against the greenback with USDCAD trading at around the 1.3000 level, despite a 100 bps rate hike by the BOC which exceeded market’s expectations of a 75bps hike. Meanwhile, WTI crude prices slipped below $97 per barrel on Monday as supply concerns eased while demand outlook remains grim with possibility of further lockdowns in top importer China. US energy envoy Amos Hochstein expressed optimism that major Middle Eastern producers have spare capacity and are expected to increase supplies. Moreover, the recently appointed head of Libya’s National Oil Corp. also declared that the nation’s oil output will resume from all closed fields and ports. On the other hand, Gold extended its decline against the greenback as prospects of higher interest rates dampen the appeal of the non-yielding asset.
