Weekly Market Update 23 January – Dollar index extended its decline on softer economic data and expectations of a less hawkish Fed

Weekly Market Update 23 January – Dollar index extended its decline on softer economic data and expectations of a less hawkish Fed

1. Dollar index extended its decline to trade below 102 level, reaching its lowest point in eight months as looming recession risks and expectations of a less hawkish Fed continue to weigh on the Dollar. As inflation eased, markets are pricing in a 95% chance of a 25bps rate hike in February’s FOMC meeting. Furthermore, Fed Governor Christopher Waller stated that the upcoming changes and easing price pressures have brought monetary policy close to being “sufficiently restrictive”. Meanwhile, recent economic data pointed to a slowdown in the US economy as retail sales and PPI data disappoint and bolstered bets that the Fed would moderate its pace of tightening to balance inflation and growth. In the coming week, notable releases include services and manufacturing PMI data, GDP, jobs and home sales data as well as Core PCE Price Index, which could provide insights to the Fed’s path of rate hikes going forward.

2. Euro extended its rally against the greenback, trading at around $1.09, near a nine-month peak against the Dollar as narrowing interest rates differentials, expectations of a more hawkish ECB and less aggressive Fed supported its rally. The ECB is expected to increase interest rates by 50 basis points in both February and March, with the deposit rate reaching 3.25%, up from its current 2%. Hawkish remarks from Governing Council member Klaas Knot also bolstered bets of further hikes as he signalled at least two more 50bps rate hikes with tightening cycles lasting until summer. Elsewhere, Pound hovered at around $1.242, near its six-week high on the back of a weaker Dollar. Recent UK economic data suggested that the broader economy is facing headwinds as the most recent PMI survey pointed to the sharpest decline in business economic activities in two years, weighed down by rising rates, a sluggish economic outlook, weak consumer demand and strikes. BoE is expected to deliver a 50bps rate hike in February’s meeting to curb inflation, with markets expecting a 4.5% peak in the middle of this year.

3. Australian Dollar traded at around $0.71 and reached a fresh high in more than five months, as upside surprises in consumer inflation data cemented expectations for more aggressive tightening cycles by the RBA, with markets expecting a 25bps rate hike in February. Annual inflation in Australia rose 7.8% in the December quarter, beating estimates of 7.5%. Elsewhere, Kiwi Dollar dipped below $0.65 as annual inflation data fell short of RBNZ’s forecast with markets anticipating at 50bps rate hike in February, a downshift from a 75bps rate hike in November. In the December quarter, New Zealand’s annual inflation rate was 7.2%, above market forecasts of 7.1% but below RBNZ’s forecast of 7.5%. Meanwhile, Loonie rallied higher against the greenback with USD/CAD trading below $1.35. On the data front, Canada’s annual inflation rate dipped to 6.3% in December, the lowest level since February, as reported by Statistics Canada. The main contributor to this decline was a 13% drop in gasoline prices, with the average price of gasoline in Canada now only slightly higher compared to the same time last year, before the Russian-Ukraine conflict.

4. WTI crude oil remained stable above $80 per barrel as markets weighed between a potential demand recovery in China and concerns about a global economic slowdown. Additionally, an industry report showed that US crude oil inventories increased by 3.38 million barrels last week, higher than the forecasted increase of 1.6 million barrels. Investors are closely monitoring OPEC+’s decision on oil production levels as an advisory committee of ministers is expected to recommend maintaining current production levels during their meeting next week. Meanwhile, the impact of sanctions and price caps on Russian petroleum products are set to come into effect next month. Elsewhere, Gold traded above $1,930 per ounce, hovering near its highest level in nine months in response to softer US economic data, mixed corporate earnings and comments from Fed officials which suggested a moderation to its current pace of tightening.