Weekly Market Update 20 February – Dollar rallies to a month-high of 104.6 on strong economic data and hawkish signals from Fed officials
Weekly Market Update 20 February – Dollar rallies to a month-high of 104.6 on strong economic data and hawkish signals from Fed officials
1. The greenback rallied to a high of 104.6 last seen on 9 January, after last week’s strong economic data and hawkish comments from Fed officials. On Tuesday, m/m CPI rose by the largest amount in three months, 0.5% compared to last month’s 0.4%. Core CPI m/m also increased from last month, going up to 0.4% from last month’s 0.3%. These numbers indicate persistent inflation despite the Fed’s tightening. Wednesday’s retail sales numbers also jumped by the largest percentage in almost two years, with both m/m retail sales and core m/m retail sales beating market expectations. Retail sales m/m came in at 3.0%, surpassing estimates of 1.9%, while core retail sales m/m–which excludes automobiles–came in at 2.3%, higher than the estimated 0.9%. Thursday saw producer prices rise by 0.7%, the highest since June 2022 and above market estimates of 0.4%. Fed officials Mester and Bullard, while non-voting members of the FOMC, indicated that their colleagues should not rule out a larger rate of 50bps in future. Voting members Barkin and Bowman were coyer, as the former mentioned smaller rate hikes gave the Fed “flexibility to respond” to changing economic conditions, while the latter said that the Fed was “not finished yet” in its fight against inflation. This Friday will see the release of the Fed’s favoured inflation metric, core PCE price index, which should illuminate the Fed’s future rate hike path. Traders are starting to price in an additional June rate hike, beyond the Fed’s upcoming March and May meetings, pushing peak rate estimates to more than 50bps above the current 4.75%.
2. The euro pared early gains to close the week flat at $1.07 against the dollar, as traders flocked to the dollar on expectations that the Fed would maintain its restrictive stance for some time. Traders expect the ECB to deliver 2 more rate hikes, one 50bps hike in March followed by a final 25bps hike in May. ECB member Makhlouf was quoted saying that there is still “a way to go” before the ECB can bring inflation down to its 2% target. ECB President Lagarde spoke last Thursday to reiterate the 50bps hike next month, while signalling that the ECB would proceed from there on a meeting-by-meeting basis. Her stance was echoed by ECB member Panetta, who was in favour of smaller rate hikes in future, with no commitment to further hikes after the next one. Investors are looking to Tuesday’s PMI releases by France and Germany for clues about the economic state of the eurozone. While the strength of the dollar is expected to weigh on the euro in the short-term, there is a broader trend of investment flowing back into Europe as the ECB continues tightening.
3. The sterling ranged to end the week flat at $1.20 to the dollar, as traders digested conflicting signals about the UK economy. Earlier in the week, the number of people claiming unemployment benefits fell by 12.9k, much less than market expectations of a 17.9k increase, supporting the notion of a tight labour market, which necessitates the need for further tightening by the BoE. However, CPI data released Wednesday showed inflation slowing, with y/y CPI coming in at 10.1%, below expectations of 10.3% and last month’s 10.5%. Markets are now pricing in a peak rate of 4.55%, lower than before the CPI release. This Tuesday will see the announcement of manufacturing and services PMI data, which could signal producers’ outlook on the economy.
4. The commodity currencies all fell against the dollar to levels not seen since 6 January, as traders expected continued hawkishness from the Fed. The Kiwi dollar slumped below $0.62, after q/q inflation expectations dropped to 3.3% from the previous 3.6%. This data is in line with earlier statistics that support the picture of a slowing economy, as inflation had come in below the RBNZ’s expectations while unemployment had inched higher. Expectations are for the RBNZ to downshift to a smaller 50bps rate hike this Tuesday, after a 75bps hike at the last meeting. Meanwhile, USD/CAD rose to a high of $1.35, as the Canadian housing, manufacturing and wholesale sectors slumped. Housing starts dropped 13% compared to December last year, manufacturing fell 1.5%, while wholesale numbers fell 0.8%. Traders are looking to Tuesday’s CPI release, as an indicator of whether the RBNZ will be the first major central bank to pause rate hikes at next month’s meeting. Elsewhere, the Aussie dollar sank to $0.68, after unemployment rose to 3.7%, higher than market expectations of 3.5%. Employment also fell by 11.5k, below forecasts of a 19.8k increase. This Wednesday will see the q/q wage price index released, which should indicate whether inflation has translated into increased wages. If so, there might be continued hawkishness from the RBA to prevent a wage-price spiral from breaking out.
5. Brent crude weakened below $82 per barrel, as news of the US releasing 26 million barrels of oil from its reserves overshadowed optimism about a recovery in demand from China’s reopening. At the same time, the Fed’s continued hawkishness is expected to dampen risk-on sentiments, limiting the upside of oil in the short term. Gold fell to $1819 per ounce, the lowest level this year, as the US economy returned robust retail sales, rising CPI and producer prices despite the Fed’s tightening. Traders remain wary of further tightening by the Fed, which would cause the attractiveness of non-yielding bullion to fall.
