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Weekly Market Update 18th June – Dollar maintained its strength following the release of FOMC minutes, high volatility of currencies due to recession fears

Weekly Market Update 18th June – Dollar maintained its strength following the release of FOMC minutes, high volatility of currencies due to recession fears

1. The Dollar Index maintained its overall strength and ended at a 105.02 level after surging to a 20 year high of 105.78 earlier in the week, as investors held expectations of tightening monetary policy by the Federal Reserve. After implementation of its biggest interest rate hike in 22 years of 50 bps in May, Fed Chair Jerome Powell announced in the recent FOMC meeting of a 75 bps hike in June, with a total of 175bps of rate hikes to be implemented in the second half of 2022. Fed funds rates are still expected to end this year above 3% but are set to be brought down to 2% before 2025. On the data front, retail sales in the United States fell by 0.3% month on month in May, lower than the expected rise of 0.2% following the 0.7% month on month gain in April. As a result of the Fed’s hawkish stance, expected GDP growth has declined from 2.8% year on year to 1.7% for 2022. In the coming week, investors should keep a close watch on the appearance of Fed Chair Powell testifying on the Semi-Annual Monetary Policy Report before the Senate Banking Committee and the House Financial Services Committee.

2. Euro maintained its strength, ending the week just above 1.05 after confirmation of raising key interest rates by 25 bps in July. Inflation forecast in June rose to 6.8% in 2022 compared to 5.1% in March, with core inflation expected to hit 2.8% in 2023 well above the ECB’s 2% medium-term inflation target. The ECB held an emergency meeting on Wednesday after bond yields surged across the Eurozone. They announced the use of new instruments to tackle the widening sovereign spread as well as the continuation of the pandemic emergency purchase programme (PEPP). However, market expectations that the ECB rate hikes are less aggressive against the Fed’s moves and have made the Euro to remain less attractive than the US Dollar. In the coming week, PMI data for the Eurozone, Germany and France will be notable.

3. Similarly, the Pound held steady against the greenback, holding its strength at 1.22 on Friday after announcing the fourth consecutive rate hike of 25 bps despite the aggressive rate hikes by the Fed. BoE has indicated a possibility of tightening monetary policy by 50 bps in August, which is largely dependent on the reactions of other central banks worldwide to the Fed’s. Investors will be keeping their eyes out for the coming Inflation and S&P Global data. Meanwhile, the Bank of Japan has held firm to their low interest rates, despite other policy makers worldwide who have been hiking interest rates to tackle soaring inflation. Markets are expected to strengthen against the Japanese Yen due to differential widening, despite the market hoping for policy adjustments.

4. Commodity currencies maintained its overall strength across the week, with large volatility after the release of the FOMC meeting minutes. The Australian dollar dipped to 0.685 before recovering to above 0.706 and ended the week at 0.694, similar to where it started. RBA Governor Philip Lowe stated that a total interest rate hike of 115 bps could be expected for the second half of 2022, implying at least one 50 bps rate hike. Unemployment data revealed to remain at 3.9% for May, its lowest rate for the third consecutive month amid the recovery from the pandemic. Meanwhile, producer prices in Canada surged again for the ninth consecutive month, by 1.7% month on month in May after the 0.8% increase in April. Energy and petroleum products largely made up the upward pressure on prices, and is expected to be 4% by the end of the month. New Zealand Dollar broke below 0.62, hitting its lowest level since June 2020.

5. WTI crude futures hit a two-month low, breaking below $112 per barrel as recession fears persisted. However, rising demand from China exiting its COVID-19 lockdowns together with the declining Russian oil exports exacerbate demand and supply imbalances, signifying a positive outlook for oil in the medium term once the fears dissipate. Elsewhere, gold prices fell overall and price action remained choppy between $1800 – $1880. Looking ahead, speeches by various Fed officials would be the crucial factor for gold prices.

Salzworth Asset Management