Weekly market update 25 March – Dollar inched higher as geopolitical tensions and a hawkish Fed buoyed demand for the safe-haven asset

Weekly market update 25th March – Dollar inched higher as geopolitical tensions and a hawkish Fed buoyed demand for the safe-haven asset

1. The Dollar extended its rally, edging towards its highest level in nearly two years, fueled by a hawkish Fed before paring some gains earlier in the week to close at around 98.80 on Friday. Fed officials signalled readiness to take on more aggressive action to rein in inflation, including a possible 50 basis point interest rate hike at the next policy meeting in May. Remarks from San Francisco Fed President Mary Daly, who is notably more conservative on the tightening of monetary policy also affirmed the Fed’s hawkish stance, after she indicated support for a bigger rate hike to curb rising inflationary pressure which currently runs at a 4 decade high. Other Fed officials also echoed similar views as Fed Chair Jerome Powell left the door wide open to a larger jump in borrowing costs at the May meeting. Geopolitical tensions also buoyed demand for the safe-haven dollar ahead of US President Joe Biden’s meeting with NATO allies, where he is expected to announce additional sanctions against Russia for Ukraine’s invasion. On the data front, flash manufacturing and services PMI data reflected an expansion in the US private sector in March and recorded the fastest growth in private sector output since July 2021, as Covid- 19 restrictions eased and supply chain disruptions softened.

2. The Euro struggled for further upside against a stronger greenback and hovered at around $1.1 in the last week of March, before paring recent gains to close lower on Friday. In its March meeting, ECB surprised markets with the acceleration of its stimulus exit although President Lagarde clarified that the ECB would be in no hurry to raise rates. However, rising inflation, exacerbated by rising commodity prices and geopolitical tensions, could put pressure on the back of the ECB to raise interest rates this year, with money markets pricing two quarter-point hikes from the ECB in 2022. Inflation continued to climb for Germany’s economy in March, with businesses witnessing record increases in both input costs and and output prices. Businesses expectations on the other hand, worsened considerably, falling to their lowest level since June 2020. Elsewhere, Sterling retreated from a 3-week high of $1.33. Chancellor Rishi Sunak announced a 6-billion pound ($7.9 billion) tax cut for workers, slashed fuel duty and signalled a future reduction in income tax to alleviate rising costs pressures and a squeeze in living standards. The Office for Budget Responsibility (OBR) downgraded its 2022 growth forecast to 3.8%, from a previous estimate of 6% and predicted that inflation could hit a 4 decade high at 8.7% this year, exacerbated by the conflict in Ukraine. The latest data showed consumer prices in the UK exceeded market estimates of 5.9% and jumped to a 3 decade high of 6.2% from a year earlier in February, stoking bets of further interest rate hikes by the Bank of England.

3. The Aussie closed above $0.75 on Friday to reach its highest levels in nearly five months, buoyed by rising commodity prices which benefited the country as a net energy exporter and major producer of basic materials. Minutes of the latest policy meeting showed the RBA acknowledged the Ukraine war as a “major source of uncertainty,” but it would wait to see how factors affecting inflation evolved. Markets are expecting the RBA to follow in the Fed’s footsteps in tightening its monetary policy, with expectations that the official cash rate will reach 1.5% this year. Like its counterpart, the Kiwi Dollar hovered at its highest level in four months as the IMF urged the RBNZ to make “significant increases” to the Official Cash Rate in the near-term to get on top of inflation. The central bank is expected to raise its benchmark rate six more times this year, with a 25 basis point rate hike each time as forecasts published by the RBNZ showed the cash rate climbing to 2.5% over the next 12 months and peaking at about 3.25% at the end of 2023.

4. The Loonie rallied higher, supported by higher oil prices after reports of a missile strike and a fire at Saudi Arabia’s state-run oil company Aramco’s facility. Brent crude oil snapped its two-week losing streak and rallied above $120 this week, as sanctions against Russia, a prolonged shutdown of the Caspian Pipeline Consortium terminal damaged by a major storm and a decline in US crude inventories fueled concerns of further supply disruptions. Meanwhile, the US and its allies are in the midst of discussions for a coordinated release of oil from its emergency stockpiles to tackle the supply shortages in a bid to cool rising prices. Gold prices steadied around $1,960 an ounce on Friday as investors looked to hedge against inflation and geopolitical risks arising from the Ukraine crisis.