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Weekly Market Update 24th July – Dollar pared recent gains on softer economic data with more downside risks seen

Weekly Market Update 24th July – Dollar pared recent gains on softer economic data with more downside risks seen

1. Poorer-than-expected business activity surveys weighed on a market outlook clouded by growing prices and recession fears, causing the Dollar index to lose ground on Friday and test the 106 level for the first time in more than two weeks. Due to a severe slowdown in the service sector, the US economy contracted in July for the first time in almost two years. A less hawkish stance from the Federal Reserve, after pushing back on forecasts of a 100 basis points hike also put the Dollar under further pressure as the gap between the Fed and major central banks narrowed. In the coming week, traders will turn their attention to earnings with almost a third of the S&P 500 business publishing their quarterly results and the FOMC decision, with expectations for the Fed to raise interest rates by 75 basis points in its upcoming meeting. Other notable publications include the preliminary estimate of GDP, unemployment claims and PCE Price index data.

2. Euro pared recent losses against the greenback, after the ECB increased the three main interest rates by a greater than anticipated 50 basis points and approved the Transmission Protection Instrument. However, stagflation risks continue to weigh on the currency, following disappointing PMI data and recessionary concerns. Early PMI surveys pointed to contraction in the Eurozone’s economy, with Germany seeing the greatest decline and France experiencing the worst pace of expansion in 16 months. Elsewhere, Sterling traded at $1.22 against the greenback, as investors anticipate more aggressive tightening by the Bank of England to rein in inflation running at a 4 decades high of 9.4% yoy in June. On the data front, retail sales in June declined less than anticipated, and the British economy performed significantly better in July as both the manufacturing and services PMI data signalled expansion in the region. Meanwhile, BoE Governor Andrew Bailey said that the bank remains completely dedicated to getting inflation down to the objective of 2%, opening the door for a 50bps hike in August, which would be the largest since 1995.

3. Commodity currencies also rallied against the greenback, supported by the recent Dollar’s weakness. The Australian dollar rose above $0.69, near its highest level in a month as RBA’s monetary policy meeting minutes signalled further interest rates hike ahead. RBA Governor Philip Lowe noted that gradual interest rate hikes are necessary in the coming months while cautioning against upside risks to inflation, with markets anticipating an even greater increase than the 50 basis point hike that RBA made in July. In the coming week, CPI data will be closely watched as a measure of inflation. In New Zealand, the inflation rate surged 7.3% in the second quarter of 2022 from a year ago, recording the fastest pace of growth in 32 years and raising the prospect of a 75 basis point rate hike in RBNZ’s monetary policy meeting in August. Meanwhile, the Canadian dollar traded at $1.29. On the data front, Canada’s annual inflation rate continued to rise, reaching 8.1% year over year in June, following a 7.7% gain in May while producer inflation eased for a third month in a row and retail sales increased significantly more than forecast despite rising price pressures.

4. WTI Oil prices extended its decline to below $94 per barrel, weighed down by slowdown concerns that outweighed supply constraints. A quarter of the people in top importer China in partial or complete lockdown serves to prolong the economic uncertainties that the country is currently experiencing. Elsewhere, President Joe Biden failed to persuade Arab leaders to commit to pumping additional oil last week, while Russian Central Bank Governor Elvira Nabiullina stated her country would not supply oil to nations that would set a price restriction on its oil. On the other hand, Gold benefited from a weaker greenback and recession fears as the bullion remains a traditional hedge against inflation and uncertainties.

Salzworth Asset Management