Weekly Market Update 19 June – Dollar pares early gains as Fed signals rate pause
Weekly Market Update 19 June – Dollar pares early gains as Fed signals rate pause
1. The dollar index pared early gains to fall from 103.7 to a month low of 102.1. This has been spurred by a “hawkish pause” in last week’s meeting where the Fed decided to hold rates steady between 5 to 5.25 per cent. While markets were anticipating only one rate hike, the Fed has signalled its intention for 2 further rate hikes. This presents a sub divergence in market sentiments and the Fed’s policies. Last week’s data showed consumer prices increased by 4% last month compared to the same period a year ago, which is a lower-than-anticipated rise and the slowest since March 2021. This development has raised optimism that inflation will continue to moderate as expected. The Consumer Confidence Index increased from 59.2 in May to 63.9, surpassing market expectations of 60. In June, job growth in the United States gained momentum. However, there was a notable rise in the unemployment rate to 3.7%, reaching its highest level in seven months. This increase suggests that labour market conditions are becoming less favourable, weakening the case for further rate hikes. The Commerce Department reported a 0.3% increase in retail sales last month, which exceeded the expectations of a predicted 0.1% decline.
2. The euro rallied against the dollar last week, jumping to a month-high of $1.0950 after the ECB struck a hawkish tone at their latest meeting. The ECB raised rates by the expected 25bps, while ECB President Lagarde went further than her US counterpart to call a rate hike at July’s meeting “very likely”. The ECB revised its inflation expectations upwards, with Lagarde anticipating inflation to remain “too high for too long”. Markets responded by pricing in an 80% probability of two more hikes, beyond what the ECB has signalled. Consensus on the September meeting remains out of reach for the ECB, with prominent hawk Nagel suggesting continued hikes, while the unusually dovish Villeroy was more hesitant. More ECB policymakers will speak this week, which coupled with German and French PMI data, could provide investors with more insight on the future rate path.
3. The pound sterling broke above a year-high against the dollar, strengthening to $1.28. In a week when other central banks were raising rates, the BOE was given more data to base its next decision on. Unemployment claims unexpectedly shrank by 13.6k compared to the previous month, while wages continued rising by 6.5% 3m/y compared with expectations for it to remain at 6.1%. BOE Governor Bailey added to the hawkish narrative when saying that inflation would take longer to return to target. On top of the strong labour market, GDP m/m was in line with the estimated 0.2%, up from the previous -0.3%. Markets hence expect the BOE to continue raising rates by 25bps at this Thursday’s meeting. However, one crucial consideration remains, CPI y/y, which is due Wednesday. It is forecast to fall, but with the BOE just recently accepting an external review of its oft-inaccurate inflation forecasting model, markets would be wise to discount said forecast.
4. The commodity currencies strengthened against the dollar last week, with the Fed’s first pause in 15 months contributing to the dollar’s weakness. The Kiwi dollar rose to $0.6240, despite the New Zealand economy falling into a technical recession after contracting for two consecutive quarters, -0.1% in Q1 2023 and -0.7% in Q4 2022. A bright spot was the narrowing trade deficit, supported by a rebound in tourist numbers. Inflation is expected to remain high, which could support higher rates for longer, keeping the kiwi supported. The aussie dollar climbed to $0.6890, after a robust employment report that showed a record 14M employed, rising by 75.9k from the previous month when expectations were for 18.6k jobs to be added. The unemployment rate also fell to 3.6%, when it was forecasted to stay at 3.7%. The strong economic data led to the Australian yield curve inverting for the first time since the 2008 financial crisis, as traders increased bets of a recession in the near future from the RBA’s continued tightening. Minutes from the RBA’s policy meeting will be released this week, which would shed light on how much further rates could be raised. The loonie gained against the dollar, with USDCAD falling below a nine-month low of $1.32. Surging immigration, with the Canadian population reaching 40M for the first time, has helped the economy weather the BoC’s rate hikes, forcing the BoC into a resumption of rate hikes early this month. With almost two-thirds of Canadians reporting that their personal spending levels are being affected by high interest rates, markets are turning to retail sales data due this week for signs on consumer spending before the latest rate hike is announced.
5. Brent crude saw some minor gains to close above $76 per barrel last week, upon indications that China’s crude usage would continue to grow, in addition to a robust US driving season, OPEC production cuts, and a halt in Fed rate hikes would all support the demand for oil. However, the upside remains limited due to an overwhelming supply of crude in the market. Refinery outages in the US and Europe are raising crude inventories at hubs, including Cushing, Oklahoma, where stockpiles are already at a two-year high evident from the price of the West Texas Intermediate which has declined by 11% this year. Gold ended the week nearly flat at $1958 per ounce, bouncing off a key low of $1933 as markets turned bearish towards the dollar. However, gold remains range-bound as risk-on sentiment is strong, with US equities rallying for the fifth-straight week. With unemployment and PMI data on the US economy due this week, markets might see further volatility as traders assess the US economy’s health.
