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Weekly Market Update 27 August – Dollar weakened after comments from Fed Chair Powell, U.S. non-farm payroll data in focus for the week

Weekly Market Update 27 August – Dollar weakened after comments from Fed Chair Powell, U.S. non-farm payroll data in focus for the week

1. The Dollar Index dipped after comments from Federal Reserve Chairman Jerome Powell during the Jackson Hole Symposium indicated that while the Fed might start tapering by the end of the year, there is nothing certain about the rate hikes as there is “much ground to cover” before the economy hits full employment. Meanwhile, the Fed will also continue to hold the target range for the Federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time. On the data front, US Michigan Consumer Sentiment still showed the worst reading in a decade due to smaller income gains amid high inflationary trends. Initial Jobless Claims rose to 353 thousand after four weeks of consecutive declines, surpassing estimates of 345 thousand. With all these in mind, investors will turn their attention to August’s jobs report, to get a further gauge on the tapering plans of the Federal Reserve and the state of the labor market recovery. Other notable publications are the ISM PMI data which should reflect a recovery in the manufacturing and service industries.

2. The Euro and Sterling outperformed the US Dollar this week after Federal Reserve Chairman Jerome Powell indicated that there will not be a rush to implement interest rate hikes. As such, investors avoided the dollar in favor of their peers, allowing the Euro and Sterling to rise. However, supply chain issues continue to hamper manufacturing growth and private sector activity in the region, weighing on the PMI data from the Eurozone. Elsewhere, the ECB remains committed to keeping rates low in order to push inflation back to its 2% level, while keeping the option of tightening monetary policy at bay. Meanwhile, the Bank of England has indicated a slightly hawkish tilt by suggesting that “some modest tightening” of monetary policy could be required within the next two years for continued economic recovery. As the month of August draws to a close, investors would mainly be looking out for Consumer Price Index (CPI) estimates from the Eurozone which should record a 2.7% growth, surpassing the ECB’s target of 2%.

3. Commodity currencies outperformed against their peers after the U.S. dollar suffered in the week. However, the upside on the Aussie and Kiwi dollar continues to be limited by the effects of Covid-19 on the economy. Australian retail sales data disappointed while New Zealand’s trade balance also fell to a larger year-on-year deficit. Furthermore, the RBNZ has unexpectedly held its official cash rate at a record low, and the country has been on a nationwide lockdown since August 17th. Elsewhere, Crude oil posted some gains this week, with WTI crude oil futures rising by 10.6%. However, the upside could be limited as countries in the Asia-Pacific have imposed fresh restrictions to curb the spread of the Delta variant. Gold, on the other hand, rose 1.5% to $1,818 per troy ounce on Friday after Federal Reserve Chairman Jerome Powell’s announcement. Moving ahead, with a weaker dollar and fresh restrictions hampering the positive sentiment on COVID-19 recovery, we could see gold prices gaining slightly as investors turn to it as a traditional safe-haven asset. On the data front, notable publications include Australia’s second-quarter GDP and retail sales numbers.

Salzworth Asset Management