Weekly Market Update 26 June – Fed’s Hawkish Testimony Drove Dollar Above 102.8
Weekly Market Update 26 June – Fed’s Hawkish Testimony Drove Dollar Above 102.8
1. The dollar exhibited strength last week, closing above 102.8, mainly driven by the hawkish testimony from Fed Chair Powell. His emphasis on a data-dependent approach to interest rate policy and his view that there is no urgent need to accelerate the pace of rate hikes, as the terminal rate is approached, diverged significantly from the BOE and other major economies. Unemployment claims surpassed estimates, reaching 264K claims. However, losses were quickly reversed following Powell’s testimony on Thursday. Powell acknowledged the cautious approach the Fed will maintain regarding rate decisions, while also recognizing that inflation persists above their target rate of 2%. However, when asked about the possibility of rate cuts, Powell mentioned that he does not foresee such actions “happening any time soon”, bolstering the dollar’s strength. Powell also noted limited progress in moderating inflation within the service sector, where monetary policy is expected to have an impact, indicating potential future hawkishness. This was supported by the service PMI data, which came in at 54.1, surpassing market forecasts of 53.9. However, the dollar’s strength was dampened by weak manufacturing PMI readings, which fell below market expectations at 46.3. In the upcoming week, market participants will closely watch the CB consumer confidence survey and Powell’s testimony. Later in the week, economic indicators such as Final GDP, unemployment claims, and core PCE, the Fed’s preferred metric for measuring inflation, will provide insights into the US economy’s health, influencing the Fed’s future policy decisions.
2. The euro remained stable in the first half of the week but weakened against the strengthening dollar, ending the week at $1.09. This decline was driven by deteriorating PMI statistics, particularly in France and Germany. French manufacturing and services PMI remained in contraction territory, reporting at 45.5 and 48 respectively. Similarly, German manufacturing and services PMI readings fell below market forecasts, with readings of 41 and 54.1 respectively. The overall weakening of these major eurozone economies had an impact on the entire eurozone, as flash manufacturing and service PMI came in below estimates. Looking ahead, the market can anticipate CPI data from key eurozone economies such as Germany, France, and Spain, as well as the eurozone CPI estimate, which will provide insights into the future rate decisions of the ECB.
3. The pound sterling weakened against the dollar, reaching $1.27, amid mounting concerns about the UK economy. The CPI y/y growth exceeded expectations at 8.7%, leading to a surprise 50bps rate hike by BOE. With a 7-2 vote, the Monetary Policy Committee raised rates to 5%, the highest level in 15 years and the largest increase since February, aiming to control inflation. Initially, the rate hike strengthened the pound, but concerns grew as markets worried about the impact of high interest rates on the economy and households facing a cost-of-living crisis. BOE Governor Bailey acknowledged the adverse effects on individuals with mortgages or loans but emphasized the necessity to prevent a worse outcome in the future. Additionally, with manufacturing and services PMI at 46.2 and 53.7 respectively, the UK’s economy is seen to be declining, diminishing the attractiveness of the currency despite the higher yield. The market now assigns a 30% probability that the key rate will peak at 6.25% by February, suggesting the potential for further rate hikes of one-and-a-quarter points.
4. The loonie strengthened against the dollar, pushing USDCAD below $1.32. Retail sales grew by 1.1%, surpassing expectations. Expectations of further rate hikes have increased, with a 75% probability of a 25bps increase in the upcoming July meeting. Market participants are pricing in two rate hikes by December. This week, focus will be on Canadian CPI and GDP data, with expectations of 4.0% CPI growth and 0.2% GDP growth. The aussie declined against the dollar, closing below $0.67 following the release of the monetary policy minutes. The minutes highlighted both upside and downside contributors to inflation, with recent data indicating more upside pressures. The board agreed to closely monitor household spending trends, considering their implications for inflation, as well as global economic and domestic labour market developments. The data-dependent approach reduced expectations of further tightening in the near future. CPI news for the Australian economy is expected later this week. The kiwi declined against the US dollar, closing near $0.61, reflecting negative market sentiments stemming from New Zealand’s recession announcement last week. Despite the surprise trade surplus of 46M, surpassing expectations of a 350M trade deficit, the GDT Price index remained unchanged at 0.0%, contrary to economists’ previous predictions of a global demand and supply rebalancing. Market participants are awaiting the business confidence survey and the RBNZ’s statement of intent as New Zealand strives to steer its economy out of recession.
5. Brent crude fell to around $72 per barrel on recession fears caused by aggressive rate hikes from major central banks. The global economic outlook and energy demand were affected by the central banks’ hawkish messaging and tightening monetary policies, as well as a slowdown in manufacturing and services activities indicated by PMI data. As a result, investors turned to safe-haven assets, pushing gold above $1,920 an ounce. However, US Federal Reserve’s indication of further rate increases, as emphasized in Fed Chair Powell’s testimony, creates a restrictive environment that limits the upside potential for gold.
