Samples 4 1

Weekly Market Update 19th August – Dollar rallied nearing a new high, supported by hawkish Fed comments

Weekly Market Update 19th August – Dollar rallied nearing a new high, supported by hawkish Fed comments

1. The Dollar index rallied this week and ended above the 108 level, approaching a 20 year high. This was buoyed by the release of 27th July FOMC meeting minutes as well as hawkish comments made by FOMC members. St. Louis Fed President James Bullard mentioned support for another 75 bps rate hike in September to continue its fight against rising inflation, with a few others supporting further rate hikes until the peak of inflation is completely over, increasing anticipations for more tightening cycles. On the data front, Retail Sales data surprised the market, staying more resilient than expected at a 0.7% increase and a 0.3% increase in core retail sales. On the other hand, housing data remained weak as uncertain global market expectations continue to discourage the purchase of big ticket items. In the coming week, investors will be taking note of Flash Services PMI, Preliminary GDP data as well as Fed Chair Jerome Powell’s speech at the Jackson Hole symposium.

2. Following the stronger dollar, the euro depreciated against the greenback to below $1.01, almost hitting its previous 20 year low. The Eurozone’s July inflation rate came out at 8.9% year-on-year as expected, a 0.3% rise from June’s inflation rate, buoyed by the energy crisis due to supply shortages in Russia. The market anticipates a 50 bps rate hike in September, similar to the previous one in attempts to curb the soaring inflation. Similarly, the Pound suffered against the stronger greenback, hitting below the 1.18 level near its previous low. UK inflation revealed to be a 40 year high at 10.1% above the expected 9.8% in July, amplifying fears of higher interest rates and a weaker British economy. Another 50 bps rate hike is expected for the 7th consecutive hike, which would push the main interest rate to 2.25% on 15th September, increasing borrowing costs to the highest level since 2008. Notable publications in the coming week include Flash Services and Manufacturing PMI.

3. Commodity currencies generally depreciated this week, driven by the dollar strength. The Kiwi fell below 0.618 against the greenback, after announcing the 4th consecutive 50 bps rate hike at the start of the week, raising its official cash rate to 3.00%. The RBNZ stated that they would remain hawkish until interest rate falls and increased the forecasted rate peak to 4.1% in Q2 2023. The Australian dollar weakened below $0.69 after unemployment rate fell to a 48 year low of 3.4% in July, and net employment fell by 40.9k instead of the expected 26.5k rise in jobs. Previous anticipations of a 50 bps rate hike by RBA have been displaced in view of the weak employment data. Similarly, the Canadian dollar depreciated below $0.77 at the end of the week, and despite headline inflation easing for the first time in over a year, BoC is anticipated to continue tightening their monetary policy.

4. Brent Crude oil fell to almost $95 per barrel on Friday, extending its decline since fears of a global recession escalated in June, buoyed by the strong greenback. President Joe Biden spoke with leaders from countries including France, Germany and the United Kingdom regarding discussions towards an Iran nuclear deal to ease sanctions on Iranian oil. Elsewhere, gold prices extended its decline by 3% to below $1750 at the end of the week, the month’s lowest level, driven by the strengthening dollar. Looking ahead, gold prices may continue to struggle against the hawkish Feds until inflation slows.

Salzworth Asset Management