SW Weekly Market Update 4

Weekly market update 19 December – Dollar extended its climb supported by a hawkish Fed, monetary policy outlook divergence persists between ECB and major central banks

Weekly market update 19 December – Dollar extended its climb supported by a hawkish Fed, monetary policy outlook divergence persists between ECB and major central banks

1. The U.S. Dollar strengthened against other major currencies towards a 3-week high of 96.87, as investors flocked towards the safe-haven currency and away from riskier currencies after fears over the omicron variant of the COVID-19 virus intensified, given how fast it has been spreading. Major central banks around the world began indicating a possible hawkish pivot in monetary policy, and the U.S. Federal Reserve had also signaled for three imminent rate hikes by the end of 2022 and an end of its ultra-easy monetary policy in response to rising inflation. Major U.S. stock indices also ended lower on Friday, as bank shares dropped significantly after Thursday. Moving ahead, the U.S. Dollar is likely to continue maintaining its strength with the year coming to an end, as uncertainties continue to keep a lid on the market’s risk appetite. Ahead of Christmas, investors will be looking to core PCE price index and GDP data for a better gauge of how the U.S. economy and inflationary pressures are faring as 2021 comes to a close.

2. The euro traded around $1.13, after the ECB announced a reduction in the pace of its asset purchases, matching investors expectations after Christine Lagarde mentioned about a hawkish pivot before the release of the monetary policy. The bank also said it would ramp up bond buys under its longer-running but more rigid APP, aiming to offset some of this lost stimulus. ECB officials, however, have also maintained their narrative that the last spike in inflation is transitory. The Euro is expected to end the year lower as the monetary policy outlook divergence between ECB and the Fed remains significant; the Fed announced plans to speed up its tapering of bond purchases, while ECB signaled that any exit from years of ultra-easy policy will be slow. On the data front, the Eurozone trade surplus narrowed sharply to EUR 3.6 billion in October 2021 from EUR 29.8 billion in the same period last year and well below market expectations of EUR 7.6 billion. Elsewhere, the pound traded around $1.33, after the Bank of England raised interest rates for the first time since the onset of the pandemic, surprising markets that forecasted unchanged rates. FTSE pointed lower from pandemic and inflation woes despite gains after the announcement from BOE. UK 10 year government bond yield rose to 0.8% after a surprise rate hike by the BOE. UK retail sales rose 1.4% month on month in November, beating market expectations of a 0.8% gain and were 7.2% above pre pandemic levels, signaling strong domestic growth. Meanwhile, Boris Johnson’s party lost a by-election in the traditionally conservative constituency of North Shropshire.

3. The Aussie traded below 0.72 against the US dollar on Friday, remaining under pressure as Reserve Bank of Australia governor Philip Lowe reiterated that the central bank would keep interest rates at record low in 2022. Investors would be anticipating RBA’s meeting minutes next Tuesday to get an idea of Bank of Australia’s stance. New Zealand dollar, on the other hand, remained below 0.68 against the US dollar on Friday, hovering near 13-months lows as a milder than expected economic contraction failed to give the currency a bullish pump. The New Zealand dollar also depreciated against other major currencies due to a hawkish pivot from the other respective central banks amid the risk-off market sentiment. The Canadian dollar traded around 1.284, weakening from a nearly one-week high of hit on 16th December, but its further depreciation was capped by rising oil prices. Gold firmed up above $1800 an ounce as it is often seen as a hedge against inflation though prospects of higher interest rates, following hawkish pivots from some major central banks could dampen the outlook for the bullion.