Weekly market update 22nd April – Dollar rallied higher on the back of a hawkish Fed while commodity currencies suffered amid the geopolitical uncertainties

Weekly market update 22nd April – Dollar rallied higher on the back of a hawkish Fed while commodity currencies suffered amid the geopolitical uncertainties

1. The Dollar index broke above the 101 level to reach a high not seen in nearly 2 years, as prospects of higher interest rates from the Fed to rein in rising inflation continue to support its climb. Speaking at a panel hosted by the IMF on Thursday, Fed Chair Jerome Powell said a 50-basis point interest rate increase was “on the table” for May and reiterated that Fed officials were committed to “front-end loading” efforts to rein in inflation. The latest S&P Global flash PMI data signalled a strong, but slower increase in business activity across the US economy in April, attributed to January’s Omicron-induced slowdown. Overall growth was dampened by a softer rise in the service sector output as consumers continue to grapple with higher prices. Manufacturers, on the other hand, indicated a stronger expansion in production on the back of rising demand.

2. Euro edged lower against the greenback on the back of a hawkish Fed. ECB Luis de Guindos joined a growing number of ECB officials in calling for an early end of the Asset Purchase Programme along with a rate hike in July while ECB President Lagarde said the central bank might need to cut its growth outlook. On the data front, the Eurozone’s economic growth was supported by sustained rebound in the service sector which benefited from easing Covid-19 restrictions. Manufacturing PMI data, on the other hand, signalled a downturn in manufacturing production across Germany in April amid reports of severe supply disruption and a drop in demand for goods. Meanwhile, Macron beats far-right rival Le Pen in French presidential election, securing a second term as president on his pro-business and pro-EU agenda.

3. On the other side of the Atlantic, Sterling dipped below $1.290 as economic data disappointed and reflected a squeeze in household income as the economy grapples with rising inflation. British retail sales volumes tumbled 1.4% from a month earlier in March, much worse than market expectations of a 0.3% decrease. Meanwhile, PMI data signalled a slower pace of economic growth during April with service providers experiencing a considerable loss of momentum while manufacturers also faced a headwind to order books from rising output charges. With inflation standing at a 3 decade high of 7% in March, markets are expecting the Bank of England to raise rates to 1% during the meeting on May 5th.

4. Commodity currencies suffered against a stronger greenback following affirmation by the Federal Reserve Chair Jerome Powell for more aggressive rate hikes ahead to rein in inflation. Kiwi Dollar broke below $0.67 as RBNZ raised interest rates by an aggressive 50 basis points, though it tempered that a little by not lifting its projected peak for rates, which could be seen as a shift from its previous hawkish stance. Meanwhile, Governor Adrian Orr said earlier this week the RBNZ is focused on containing inflation expectations and expects to put into effect more rate hikes in coming quarters. Aussie broke below $0.735 on Friday, hitting its lowest in a month. Minutes of the latest RBA meeting suggested it was edging closer to raising interest rates for the first time in more than a decade due to accelerating inflation and rising wages. Investors will be keeping a close watch for the CPI data released in the coming week which could pressure the RBA to shift to a more hawkish stance. Elsewhere, gold closed around $1,930 an ounce on Friday, the lowest in two weeks as the dollar-denominated asset suffered against a stronger greenback following Fed Chair Jerome Powell’s hawkish comments. Going forward, gold could extend its decline as prospects of higher interest rates dampen the appeal of the non-yielding asset. However, any downside could be limited as geopolitical uncertainties continue to drive safe-haven demand.

5. Lonnie weakened against the greenback as the commodity currency suffered from lower oil prices and risk aversion. Oil prices retreated from its recent highs to close around $101 a barrel on Friday amid worries that prolonged lockdowns in Shanghai would dent global economic growth and demand for fuel. According to Bloomberg, China’s demand for gasoline, diesel and aviation fuel in April is expected to decline 20% yoy, equivalent to a drop in crude oil consumption of 1.2 million barrels a day. On the data front, US crude oil inventories tumbled 8.02 million barrels to 413.7 million barrels in the week ended April 15th, the most since January of 2021 and compared with market expectations for a 2.471 million increase. Crude stocks at the Cushing, Oklahoma, went down by 0.185 million barrels. Meanwhile, Canada’s annual inflation rate accelerated faster than expected in March, hitting a 31-year high of 6.7% which cemented the narrative that the Bank of Canada will have to raise interest rates further to curb rising prices.