Weekly Market Update 23 October – Dollar Holds Steady in 106.2 to 106.5 Range After Fed Chair’s Address

Weekly Market Update 23 October – Dollar Holds Steady in 106.2 to 106.5 Range After Fed Chair’s Address

1. Last week, the US dollar fluctuated within a narrow trading range between 106.2 to 106.5 range but closed at the lower end as market caution followed Fed Chair Powell’s speech. On Monday, the Empire State Manufacturing Index pleasantly surprised with a -4.6 reading, better than the expected -6.4, partially due to a slight dip in new orders. Conversely, retail sales showed a robust 0.7% monthly growth, surpassing the 0.3% estimate, highlighting the economy’s resilience. The labor market exhibited optimism as unemployment claims dropped to 198K, below the 210K forecast, indicating a tightening labor market. Powell emphasized potential rate hikes with strong consumer demand and tight labor conditions. This week, markets await the advanced GDP growth, expected at 4.3%, and the Core PCE Price Index, forecasted at 0.3%, with the consumer sentiment survey and PMI indicators as leading indicators of economic health.

2. The euro experienced a brief respite against the weakening US dollar, closing higher at approximately $1.06 last week, driven by positive economic sentiment. This boost was fueled by a reduction in inflationary pressures within the economy and the perception of stable short-term interest rates. Notably, the German ZEW indicator of economic sentiment exceeded expectations, coming in at -1.1 instead of the anticipated -9.1. This sentiment was further affirmed as the final core CPI year-on-year figure matched expectations with 4.5% growth, indicating a moderation in inflation across Eurozone economies. Looking ahead to this week, market attention is focused on the release of PMI survey results and the European Central Bank’s rate decision, which is expected to remain at 4.50%. Any potential rate hike by the ECB, combined with positive PMI data, could result in significant strengthening of the euro.

3. In the past week, the pound sterling displayed limited fluctuations in the market and ended the week without significant change at $1.21. These movements were largely due to conflicting economic data, leaving the market uncertain about the UK’s future rate decisions. Notably, the average earning index over the last three months came in at 8.1%, falling below the expected 8.3%, indicating a decrease in earnings growth. Additionally, monthly retail sales underperformed expectations at -0.9%, signaling a decline in consumer spending demand. Recent year-on-year CPI data showed a growth rate of 6.7%, primarily driven by surging petrol prices, further clouding the path for future decisions by the Bank of England. Nevertheless, there is a prevailing consensus that UK inflation is expected to soften in the coming months, potentially allowing UK Prime Minister Rishi Sunak to achieve his 5% inflation target by the end of 2023. This week, market attention is focused on the release of the claimant count change data and PMI figures to gain insights into labor and business conditions.

4. In the previous week, the Japanese yen saw a decline and closed at 149.84 against the US dollar, mainly due to the moderation of inflation within the Japanese economy. Despite the national Core CPI year-on-year figure coming in slightly higher than expected at 2.8% compared to the estimated 2.7% growth, it did not lead to a strengthening of the yen. This is because inflation in Japan is still on a downward trajectory, reducing the urgency for Japan to consider policy normalization. Consequently, the yen continued to exhibit weakness in the market, repeatedly testing the significant level of 150. In the upcoming week, market focus is on the forthcoming data regarding the BOJ and Tokyo Core CPI year-on-year figures, with expectations at 3.3% and 2.5% respectively. These figures will be closely monitored to gauge the potential future policy direction for the yen.

5. The loonie weakened against the US dollar, closing above the 1.37 mark, primarily due to a cooling inflation scenario. The median CPI y/y figure showed a moderation, coming in at 3.8%, which was a more pronounced drop than the anticipated 4.0% growth. Additionally, retail sales remained lackluster, with a 0.1% decline, and a 0.7% drop in transaction volume. Given this pessimistic data, market expectations are leaning towards the BoC pausing on interest rate adjustments this week, leaving the overnight rate at 5.00%. Conversely, the aussie made modest gains against the US dollar, closing above $0.63, as market participants sensed a more hawkish tone from the RBA committee. The labour market in Australia continued to show resilience. The monetary policy minutes released on Tuesday indicated a potential shift toward a more hawkish stance by the RBA, as committee members expressed concerns and decreased tolerance for inflation. Moreover, the RBA highlighted the positive wealth effect created by rising house prices, which could support consumption and potentially increase inflationary pressures within the economy. Similarly, RBA Governor Bullock’s speech emphasized the upside risks to inflation. Although employment figures fell short of estimates, the unemployment rate remained low. This week, markets are anticipating a speech from RBA Governor Bullock ahead of the CPI data release, which will likely provide further clarity on how the inflation data will impact future rate decisions by the RBA. Meanwhile, the New Zealand dollar slipped against the US dollar, closing at $0.58, as the inflation rate fell below expectations. The latest q/q CPI data revealed a growth of 1.8%, compared to the anticipated 1.9% growth. Although core inflation year-on-year still stands at 5.8%, exceeding the RBNZ’s 1-3% inflation target, economists are interpreting this recent CPI data as reinforcing the possibility of a rate cut in the first half of 2024.

6. Gold prices continued their upward trend, ending the week at $1981 per ounce, buoyed by increasing geopolitical tensions. While the market eagerly awaits upcoming US GDP and inflation data, which could impact the DXY (US dollar index), it’s important to note that gold’s movement may not necessarily be inversely correlated with the DXY. This is because geopolitical turmoil and global economic uncertainties remain the predominant factors influencing gold prices.