Weekly Market Update 27 February – Dollar rallies to touch 105, after hotter-than-expected inflation data
Weekly Market Update 27 February – Dollar rallies to touch 105, after hotter-than-expected inflation data
1. The dollar rallied to a high of 105 last seen on 6 January, as the Fed’s preferred inflation metric, the PCE price index, came in hotter than expected. On a m/m basis, the core PCE index, which excludes food and energy, rose by 0.6%, higher than market expectations of 0.4%. This jump was the highest since June 2022, which lent support to the narrative that inflation remains persistent. Investors are hence expecting the Fed to remain hawkish as the fight against inflation promises to drag out longer than the Fed anticipated. Markets are pricing in a peak interest rate of 5.4%, beyond policymakers’ range of just above 5%. Last week also saw the release of the Fed’s minutes for the February FOMC meeting, where some officials indicated their desire for a 50bps rate hike, even though the final vote was unanimous for a 25bps hike. The Fed also does not expect inflation to return to 2% till 2025. US-China rhetoric over the Russia-Ukraine war is also driving investors to the dollar as a safe haven. More economic data will be released this week, noteworthy ones being consumer confidence, manufacturing PMI, and services PMI.
2. The euro fell to a low of $1.05 against the dollar, as investors flocked to the greenback in anticipation of further hawkishness from the Fed. Last week’s revised euro-area core inflation data hit a record high of 5.3%, increasing the likelihood of a 50bps rate hike by the ECB in March. While ECB member Villeroy reminded markets that the ECB is not committed to rate hikes for the rest of the year, his fellow member Visco reiterated that the ECB’s aim has always been to return inflation to 2%. Visco affirmed ECB President Lagarde’s stance on future rate hikes being decided on a meeting-by-meeting basis, while indicating uncertainty on the terminal rate. This week will see the release of inflation data, with core inflation expected to remain constant at 5.3%.
3. The pound pared gains to touch $1.19 against the dollar, as early signs of economic strength were outweighed by the hot US inflation data. Manufacturing PMI came in higher than expected at 49.2, beating forecasts of 47.5, while services PMI expanded instead of contracting, coming in at 53.3 instead of 49.2. The BoE is expected to maintain its current rate hike path with at most two more this year, less than the Fed because the US economy has returned more robust data than the UK. Disagreements are brewing between members of the MPC, with Tenreyro arguing the BoE has “overtightened” while Mann arguing that any pause now would cause financial conditions to loosen. BoE Governor Bailey is expected to speak at a conference this Wednesday, which should give clarity on the BoE’s rate path moving forward.
4. The commodity currencies extended the previous week’s losses to fall further against the strengthening dollar. The Kiwi fell to the lowest level this year, $0.61 to the dollar, not seen since November 2022. Last week, the RBNZ increased rates by the widely-anticipated 50bps and maintained its peak rate at 5.5%. Governor Orr all but ruled out 75bps hikes in future, except if there were surprises in the data. Elsewhere, the Aussie dollar slumped to $0.67, as the q/q wage price index came in at 0.8, below market expectations of 1.0%. Despite inflation remaining high, consumer confidence looks weak, especially as 23% of all home loans are about to be refinanced this year with higher interest rates. With the economic outlook looking poor, more traders are expecting a recession and pivot by the RBA later this year, causing short-term selling pressure on the Aussie. Wednesday will see y/y CPi and q/q GDP numbers released. In Canada, USD/CAD rose to another high of $1.36, as inflation eased from 6.3% in December to 5.9% in January, below market estimates of 6.1%. The Bank of Canada is open to pausing its rate hike at March’s meeting, which coupled with the Fed’s hawkishness, is causing near-term weakness in the Loonie.
5. Brent crude ranged to end the week flat at $83 per barrel, as US oil inventories rose and demand remained weak. The amount of US oil stock grew by close to 24 million barrels, adding to the market surplus. Despite expectations of a rebound in demand from China’s reopening, there are worries that last week’s US hot inflation reading could lead to further tightening by the Fed, putting a damper on demand. Gold fell to $1809 per ounce, a 2023-low, on the back of persistently high inflation data in the US. With traders pricing in further rate hikes by the Fed, gold’s short-term weakness is expected to continue.
