Weekly Market Update 24 April – Dollar remains range-bound as continued hawkishness from the Fed contrasts with professional investors’ bearishness
Weekly Market Update 24 April – Dollar remains range-bound as continued hawkishness from the Fed contrasts with professional investors’ bearishness
1. The dollar index consolidated between 102.2 and 101.5, as dollar bulls and bears grappled for market control. Many bulls believe that the market is wrong to diverge from the Fed on the future rate path, beyond the meeting in May. Given the numerous remarks by 7 different Fed officials last week, with no one mentioning the possibility of a pause in May, the short-term Fed stance seems to be hawkish, supporting the dollar. At the same time, while the market outlook remains less rosy compared to previous months, indicators are still showing signs of strength in pockets of the American economy. The New York Manufacturing Index exceeded expectations, coming in at 10.8 instead of contracting -17.7. The S&P Global flash April US composite PMI rose to the highest level since May last year, 53.5, the third consecutive above-50 reading signalling business expansion. However, unemployment claims inched up for the second-straight release, while the Philadelphia Fed Manufacturing Index continued contracting for the third month, posting -31.3 instead of a forecasted -19.1. The Fed’s Beige Book also showed an economy that stalled, while job growth and inflation decelerated and credit conditions tightened. These signs of a weakening economy are fuelling professional investors’ predictions of an overpriced Fed path. With the Fed’s blackout period before their next meeting in force, market watchers will have to rely on crucial data due this week, such as the Fed’s preferred inflation metric–core PCE price index, to confirm forecasts of a 25bps rate hike. Investors might also want to keep an eye on whether the debt ceiling will be lifted without major spending cuts, as the American political system is designed to cap the Treasury’s borrowing even after Congress has approved additional spending. Congress might thus use the opportunity to call for future spending cuts from other parts of the government, which could affect the economy’s growth and the dollar’s strength.
2. The euro pared losses to end the week flat against the dollar below $1.10, after briefly touching $1.09 early on. The ECB is still undecided on the size of next month’s rate hike, with 25bps and 50bps both likely. There are signs of increasing divisions between the 26 ECB officials, with meeting minutes showing March’s 50bps rate hike supported by a “large majority” of members. Prominent dovish member Visco from the Bank of Italy called for caution in implementing rate hikes, in light of worsening liquidity for businesses and the long time lags for monetary policy effects. His stance contrasted with the hawkishness from Dutch member Knot, who called it “too early” to be considering a pause. ECB President Lagarde also shared that she felt there was still some way to go before the ECB reached its peak rate, aligning with ECB Vice President Guinos who stated that inflation needs to be seen as receding to prevent the ECB from losing credibility. Most ECB officials who spoke concurred about the need to remain data-dependent moving forward. The eurozone turned in strong economic data last week, with flash services PMI in France, Germany, and the eurozone all coming in above expectations. Eurozone flash manufacturing PMI, however, was subdued, not helped by the nationwide strikes and protests in France. Inflation data for Germany and Spain are due this Friday, which could show how sticky inflation is.
3. The pound sterling closed the week slightly up at $1.24 to the dollar, with traders fully pricing in a 25bps rate hike at the May meeting. The UK economy has undergone a major turnaround from just a few weeks ago, with data last week painting a strong economic picture. Wage growth increased by 5.9%, above estimates of 5.1%, inflation remained in the double-digits at 10.1% compared to forecasts of 9.8%, while flash services PMI returned 54.9, above an expected 52.9. Retail sales slumped in March, attributed to the wet weather, but rose on a quarterly basis for the first time since August 2021. Disagreement between the BoE dovish and hawkish camps is also spilling out into the open, with prominent dove Tenreyro invoking Milton Friedman’s famous “fool in the shower” metaphor when describing rate hawks, while deputy governor Ramsden said that he preferred over-tightening to high inflation. Much can change between the May and June meetings, with two readings of inflation between them.
4. The commodity currencies all sank lower against the dollar, with the Loonie and Kiwi particularly hard-hit. USD/CAD weakened to $1.35, after poorer-than-expected retail sales data and inflation data that hovered near the BoC’s estimates, strengthening the likelihood that the BoC is done with its tightening cycle. Retail sales contracted by -0.2% in February, while core retail sales came in way below estimates, at -0.7% instead of 0.0%. GDP data is out this Friday, which would indicate the economy’s health. The Kiwi dollar fell to $0.61 last week, on weak inflation data. CPI q/q fell to 1.2% from the previous reading of 1.4%, below market estimates of a rise to 1.5%. Markets now await more data this week, including the trade balance, credit card spending and April’s business confidence. Elsewhere, the Aussie dollar fell below $0.67, despite monetary policy meeting minutes from March showing that the RBA was committed to bringing inflation down to their target of 2%. CPI data is due this Wednesday, which the RBA will likely use in its deliberations for their rate decision next week.
5. Brent crude snapped a four-week rally to sink below $81 per barrel, after Russian oil exports rebounded last week, and demand for gasoline and diesel faltered despite market expectations of a pickup in demand. Some traders expect consumption to increase in line with China’s Golden Week holiday, but further rate increases by major central banks might continue to tamper demand and weigh on the price of oil. Oil has mostly given up its gains over the past three weeks, returning to prices seen before OPEC+’s surprise output cut. Gold trended downwards last week, touching $1972 per ounce multiple times. With inflation remaining sticky in the US and Europe, the prospect of further rate hikes is exerting bearish pressure on the price of gold, given its non-yielding nature.
