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Weekly market update 21 January – Dollar steadies ahead of FOMC meeting as investors await for more hawkish signals from the Fed

Weekly market update 21st January – Dollar steadies ahead of FOMC meeting as investors await for more hawkish signals from the Fed

1. The Dollar held steady around the 95.5 level at the end of last week, as investors are preparing for more hawkish signals from the Federal Reserve in its upcoming FOMC meeting. Last week, weekly jobless claims rose unexpectedly to 286 thousand claims, well above market expectations of only 220 thousand, revealing some virus-related disruptions impeding the recovery of the labor market. Furthermore, major U.S. stock indices such as the S&P 500 saw sharp declines at the end of last week following poor earnings results from companies that performed well during the pandemic. Moving forward, the Dollar is expected to see more strength as a safe-haven currency, amid equity sell-offs and heightened tensions around the world. The U.S. central bank is scheduled to meet on January 25th-26th, and general market consensus is that there is likely to be more hawkish signals coming from the Fed about tightening its monetary policy. While interest rates are not expected to be hiked just yet, policymakers have been providing strong hawkish comments, and Fed Chair Jerome Powell has also mentioned that the U.S. is ready for interest rate hikes this year. Investors will be watching the central bank meeting closely for any indications of a more hawkish tilt in its monetary policy moving forward.

2. The Euro traded at $1.135 near the end of last week, which was much lower than the recent two month-peak at $1.148 and followed a jump in yields over the past few days. Furthermore, the ZEW Economic Sentiment Index showed that consumer confidence remained at the lowest level since March 2021, possibly explaining the underperformance of the currency. The European Central Bank is expected to maintain its slow progress on tightening monetary policy, but investors expect an interest rate hike by December 2022. Going into the new week, flash PMI data from major countries in the European bloc such as Germany and France will be watched closely as a leading indicator of the health of Europe’s economy. Similarly, the Sterling underperformed against the greenback last week, trading at around $1.36 at the end of last week. The U.K. is currently experiencing a high level of inflation, with inflation rates rising more than expected to 5.4% in December and the core index, excluding volatile items, rising to 4.2%. Retail price inflation hit a new 30-year high, and factory price data also shows similar pressures. As such, the general consensus is that the Bank of England will be raising rates again in February to handle such inflationary pressures. Furthermore, Sterling could see further downside with rising political uncertainty. U.K. Prime Minister Boris Johnson and his party are facing calls to resign after admitting that he attended staff drinks during the May 2020 lockdown period. In the coming week, flash manufacturing and services PMI will be watched closely by investors for an indication on the health of the U.K. economy.

3. Commodity currencies underperformed for the week against the steady U.S. dollar leading up to the Federal Reserve meeting. The Aussie depreciated below $0.722 in the past week, down from a high of $0.7276 despite posting stronger-than-expected employment numbers. Going forward, CPI data is expected to be released next week to give a better idea of inflationary pressures in the Australian economy. The Reserve Bank of Australia is also due to meet on February 1st to decide whether to end its bond-buying programme early, as it continues to lag behind other economies in pulling back on its pandemic-era stimulus. The Kiwi also depreciated below $0.675 under similar pressure from the dollar, while the Canadian dollar held around $1.25 before the week ended, as investors shy away from riskier assets in the current climate. Elsewhere, crude oil prices rallied, buoyed by rising global political tensions in Russia and Middle East before retreating to about $85 per barrel, as increasing crude and fuel stockpiles helped to ease the tight supply outlook. Gold, on the other hand, is seeing some short-term upside, trading at $1,840 an ounce, supported by inflationary concerns, easing U.S. bond yields and increased demand for safe haven assets. Gold prices could continue to see limited upside in the short run, but investors are still cautious of any possible hawkish surprises in the upcoming Federal Reserve meeting.

Salzworth Asset Management