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Weekly Market Update 29th July – Dollar declines following FOMC meeting, global tightening of monetary policy persists

Weekly Market Update 29th July – Dollar declines following FOMC meeting, global tightening of monetary policy persists

1. Following the FOMC’s announcement of a 75 bps rate hike in its recent July meeting, the Dollar extended its decline, ending the week at a 3 week low of $105.50. The raise in fed funds target would bring it to 2.25 – 2.50%, a cumulative of 225 bps thus far and awaiting another 125 bps rate hike by the end of the year. Fed Chair Powell left the door open to a 75bp hike at the next meeting in September and stated they were “strongly committed” to returning inflation. US consumer confidence data for July turned out weaker at 95.7 than the expected 97.0. US GDP for the second quarter came in as an improvement from previous data at -0.9%, but way below the expected 0.5%. Despite this, the Dollar is expected to remain strong in the following weeks, with the effect of the rate hike slowly taking place and being supported by policies from other countries. Notable upcoming publications include PMI and employment data.

2. Euro depreciated to $1.012 this week due to weakening growth outlook in the eurozone economy but remained at the $1.02 level at the end of the week. Euro area’s CPI data released on Friday showed a 8.9% inflation year on year for July, greater than expected 8.7% and June’s 8.6%. With no sign of peaking yet, the high inflation is mainly driven by the energy crisis and natural gas cuts. The Eurozone’s sentiment indicator plummeted in all 3 indexes on Thursday, and hit a 17th month low overall. Elsewhere, Pound traded against the greenback above $1.22, supported by the recent Dollar’s weakness. Expectations of a hawkish BoE still remains, with many looking at a 50bps hike at the next meeting to keep on par with global monetary tightening trends. In the coming week, the spotlight will be on the release of PMI data and the speech by Governor Andrew Bailey on interest rate decisions.

3. Commodity currencies generally strengthened this week, buoyed by the weakening greenback. The Australian dollar extended its rally against the greenback, hitting above $0.70, its highest in 5 weeks. Data on the Australia CPI for the second quarter displayed a 6.1% rise yoy below expectations, easing pressure for interest rate hikes. In the coming week, investors will look forward to the decision made by RBA at the next meeting, for which markets are expecting a 50bps rate hike. Meanwhile, the Canadian Dollar traded against the US Dollar at a 6 weeks high of 0.7840. The Bank of Canada is anticipated to have further tightening of their monetary policy, increasing its benchmark rate by 100 bps in July to keep inflation under control. Meanwhile, New Zealand Dollar appreciated past $0.63, its highest in a month. A 75 basis points hike to curb the 7.3% inflation for the second quarter is expected to be raised in the central bank’s meeting next month.

4. WTI Oil prices rose to above $98 per barrel this week, resuming its rally after 3 weeks of decline. The current supply with the addition of Russia’s restriction on oil exports has been insufficient for the recovering demand in the improving economy. The OPEC+ meeting scheduled on 3rd August is expected to announce an increase in oil production to improve supply-side constraints. However, analysts have warned that current production quotas are already a struggle to be met in member countries. Elsewhere, gold continued its steady climb for the third consecutive week to $1766 per ounce, buoyed by the recent dollar weakness.

Salzworth Asset Management