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Weekly Market Update 18 Sep – Dollar Ascends Beyond 105.3 as CPI and PPI Soar Last Week

Weekly Market Update 18 September – Dollar Ascends Beyond 105.3 as CPI and PPI Soar Last Week

1. The dollar surpassed the high from the previous week and concluded the week above the 105.3 mark upon elevated levels of CPI, PPI, and retail sales last week. Driven by gasoline and shelter costs, CPI y/y came in above the estimate of 3.6%, which is a forecast revised higher than the prior month’s data, and reported a growth of 3.7%. We observed rising price pressures within producers as PPI m/m revealed an upside of 0.7% growth, as energy and transportation cost surges. We can observe price trickling from producer to consumer as retail sales m/m exceeded expectations and reported 0.6% growth. The sentiment surveys for both businesses and consumers, released last Friday, indicated gloomy conditions and future expectations for the US economy. As a result, the dollar ended the day on Friday with a weaker performance. The market awaits the Federal Funds Rate decision, with current market expectations indicating a 99% probability of a rate pause at 5.50%. Additionally, we will also be receiving unemployment claims and PMI data to gauge the overall economic health of the United States.

2. Euro weakened below $1.07 against the dollar as ECB hints at a potential rate pause during its rate press conference. The economic sentiment survey in Germany has recently reported figures that, although better than expected, still reside within contractionary territory, indicating a prevailing sense of pessimism regarding the economy. Last week, the ECB raised rates by 25bps, an upside surprise that most economists failed to predict, raising the main refinancing rate to 4.50%. However, the euro fell as growing concerns over its economy surfaced, this draws a parallel to when the UK raised rates by 50 bps in face of higher-than-expected inflation back in June. In contrast to the pound sterling’s performance in June, the euro continued to decline following this news. ECB policymakers expressed the view that the existing borrowing costs have reached a level where, if sustained for an extended period, they would notably contribute to achieving the targeted inflation level. Markets anticipate gloomy news this week as Eurozone PMI data is expected to reveal ongoing challenging business conditions.

3. The pound sterling fell against the dollar, closing below $1.24 last week upon contraction in GDP m/m. From latest figures on UK employment market, where it was revealed that average earnings 3m/y, excluding bonuses, stayed at 7.8% and unemployment rate increased to 4.3%, compared to prior month’s 4.2%, market took and interpreted it as loosening of labour markets, which only meant to boost the narrative of easier monetary policy. To add on, GDP m/m for August contracted beyond estimates by 0.5% as services fell and wage strikes within the nation disrupted the economy. This week, all eyes are on the CPI y/y figures, projected to show a 7.1% growth, which will influence the official bank rate decision. Market expectations are leaning towards a 25 bps hike, potentially bringing the bank rate to 5.50%. Later in the week, we’ll also be closely watching the retail sales m/m and PMI data to gauge the delayed impact of monetary policy.

4. As the markets kicked off the week, the yen made a bold sprint ahead of the dollar, displaying impressive vigour. However, as the week unfolded, it gracefully conceded its early gains, ultimately settling at 147.80 by week’s end. Ueda said over the weekend that the central bank could end its negative interest rate policy when the 2% inflation target is sustainability achieved, which is only possible if the BOJ will have enough information by year-end to judge if wages will continue to rise — a key factor in deciding whether to pare back its super-easy monetary policy. Nevertheless, despite the efforts of verbal forward guidance, the markets swiftly relinquished their gains when US CPI figures hinted at lingering inflationary pressures. In parallel, recent data revealed that producer prices in Japan exhibited growth below expectations, standing at 3.2%, signifying an ongoing trend of decelerating prices in the Japanese economy, thereby dimming the prospect of policy normalisation. This week, markets are expecting volatility for the yen as the BOJ will announce their monetary policy statement, with the BOJ expected to keep interest rates at -0.1%.

5. Last week, the Australian dollar demonstrated notable strength, surging by over 1.58% and concluding the week near 0.65 against the US dollar. The primary driver behind this impressive performance was a substantial employment change figure, reaching 64.9k, which significantly surpassed initial expectations and overshadowed the negative figures from the previous reporting period. Looking ahead, market participants are closely monitoring the release of the Reserve Bank of Australia’s (RBA) monetary policy meeting minutes for any indications regarding future interest rate developments. In contrast, the New Zealand dollar, or the kiwi, had a comparatively lacklustre week, concluding at 0.59 against the US dollar. This subdued performance was directly influenced by a dearth of impactful economic news. However, in the upcoming week, market attention will shift towards the release of quarterly GDP figures, with current estimated forecasts priced in at 0.4%. These data points are expected to inject volatility into the kiwi’s performance. Meanwhile, the Canadian dollar, often referred to as the loonie, delivered a remarkable performance as it strengthened to $1.35 against the US dollar following robust manufacturing sales data, which showed a monthly increase of 1.6%. This week, focus will be on the announcement of Canada’s crucial Consumer Price Index (CPI) figures. The CPI data will shed light on the direction the Bank of Canada is likely to take later in the week during the summary of their deliberations, offering a deeper understanding of prevailing macroeconomic conditions influencing interest rate decisions.

6. Drowned by a series of strong US economic data and stronger CPI and PPI figures, the bullion reacted expectantly for the initial half of the week but succumbed to poor University of Michigan consumer sentiment figures. This caused the bullion to break trend and increase significantly, closing near 1924 at the week’s end and erasing all losses instantaneously. This is despite the precious metal trading at zones of high volume, with the breakout undergirding gold’s immense susceptibility to the upcoming macro headwinds and tailwinds. This week, we can expect further volatility in the bullion as the FOMC will further announce the Fd Funds Rate, economic projections and release key PMI figures.

Salzworth Asset Management