Copy of SW Weekly Market Update 6

Weekly market update 28 January – Dollar strengthened against all its peers after hawkish tilt from the Federal Reserve in latest FOMC meeting, risk-off sentiment could hold going forward

Weekly market update 28th January – Dollar strengthened against all its peers after hawkish tilt from the Federal Reserve in latest FOMC meeting, risk-off sentiment could hold going forward

1. The Dollar held steady and outperformed all its peers at the end of January, holding above the 97 level as the week came to a close. The greenback is now hovering around levels last seen in July 2020, when investors recognised that the Fed will soon be hiking interest rates. Similarly, last Wednesday, the Federal Reserve set a more hawkish tone in line with general market consensus, signalling the interest rate hike in March and suggesting that there could be more frequent and higher interest rate hikes this year as the U.S. economy remains strong. Fed Chair Jerome Powell said that there was “quite a bit of room to raise interest rates”. Recently, data has shown that the U.S. economy grew 6.9% in the last quarter of 2021, which was ahead of expectations and could support the Fed’s decision. U.S. stocks also saw some recovery over the week, with the S&P 500 and DJIA up 0.8% and 1.3% respectively, while the NASDAQ ended the week flat. Investors continue to digest earnings reports and the hawkish tilt in the Fed’s monetary policy decision. In the coming week, unemployment data will be in focus, with the release of unemployment rate data and average hourly earnings late into the week. Additionally, ISM services PMI will also be released next week.

2. The Euro depreciated against the stronger greenback as investors flocked to the safe-haven U.S. dollar after the hawkish tilt in the Fed’s monetary policy following the latest FOMC meeting. Data also showed that there was a sharp slowdown in the Eurozone’s economic growth in January, causing pressure on the Euro going forward. Going forward, investors will be watching the ECB Press Conference that will be taking place late next week and the release of the monetary policy statement from the ECB closely, in order to have a better understanding of the central bank’s stance on monetary policy for the rest of 2022. Similarly, the Pound suffered, depreciating to below $1.34 against the greenback at the end of January. Risk-sensitive currencies like the Sterling and Euro are under pressure due to geopolitical tensions between Western and Russian leaders over Ukraine. Additionally, inflation rate in the U.K. was shown to be at a near 30-year high recently, prompting expectations of interest rate hikes by the Bank of England soon. Nevertheless, investors will be watching the monetary policy statement and official bank rate release from the Bank of England next week to affirm their expectations. BOE Governor Andrew Bailey will also be speaking next week.

3. Commodity currencies suffered against the strong U.S. Dollar after the latest FOMC meeting signalled a hawkish tilt in monetary policy in line with market consensus. The Aussie depreciated to below $0.705 after the last week, as investors await the Reserve Bank of Australia’s policy meeting scheduled for the coming week. Most are expecting the RBA to adopt a more hawkish stance to curb rising inflationary pressures, as core inflation accelerated to 2.6% in the fourth quarter of 2021. The Kiwi depreciated against the greenback to a 15-month low below $0.66 as well, with investors looking out for unemployment rate data to be released next week as a gauge of the country’s labour market. The Canadian dollar also suffered, and investors will be watching GDP data released next week for a gauge on the country’s economic recovery. Elsewhere, WTI crude oil futures jumped 2% to above $88 a barrel. This comes mainly due to tight supply, partially supported by supply chain disruptions due to geopolitical risks in Ukraine. Going forward, the OPEC+ meetings will be in focus for those trading in the oil markets. On the other hand, gold prices suffered, falling to below $1800 per ounce as the U.S. dollar gained strength after the recent FOMC meeting. The gains from the past 2 weeks in gold prices were nearly wiped out as gold prices ended the week 2% lower, and could continue to see more downside going forward as the U.S. dollar continues to strengthen and increase the opportunity costs of holding the non-yielding asset.

Salzworth Asset Management