Weekly Market Update 2nd July – Dollar marched higher while oil prices dipped on slowdown fears, US jobs report and FOMC minutes in focus this week

Weekly Market Update 2nd July – Dollar marched higher while oil prices dipped on slowdown fears, US jobs report and FOMC minutes in focus this week

1. Dollar extended its rally, buoyed by a hawkish Fed following a 75bps interest rate hike during its June 2022 meeting, instead of 50bps as initially expected. Federal Reserve Chair Jerome Powell also reiterated commitment to rein in inflation at the expense of growth as he indicated that the US economy is well positioned to withstand a tighter monetary policy although growth could slow more than needed. Disappointing data also fueled slowdown fears, as the Final US GDP figures for Q1 pointed to the slowest growth in consumer spending, which is the biggest contributor to the US GDP. Rising price pressures remain a challenge to the US economy, with three key indexes outperforming forecasts. Meanwhile, US manufacturing output slid to a two-year low in June as persistent supply shortages and softer demand continue to weigh on the economic outlook. In the coming week, investors will turn their attention to the US jobs report and FOMC minutes for further insights into how the labour market is holding up amid rising interest rates.

2. Across the Atlantic, Euro and Pound suffered against a stronger greenback. Supply-driven inflation in Europe, with its heavy reliance on Russia’s energy imports accounting for an estimated 40% of its gas supplies makes it vulnerable to stagflation risks. This could further exacerbate the growth risks and put the ECB in a bind when it comes to raising interest rates to curb soaring inflation. Notable publications include Germany’s preliminary CPI data which eased to 0.1%, lower than estimates of 0.4% as the government’s relief energy package helped eased price pressures. However, effects are likely temporary with the package ending in August, alongside price pressures which continue to climb in food and service sectors. In the coming week, remarks from ECB President Lagarde will be closely watched for further clues on the interest rates. Likewise, Sterling extended its decline as rising costs weigh on living standards. Despite the BoE hiking rates five times since December, and rates standing at a 13 years high of 1.25%, inflation continues to climb and undermine growth, leaving the BoE less room to maneuver.

3. Commodity currencies borne the brunt of the risk aversion in June, weighed down by recession fears and softer commodity prices. RBA surprised markets with a 50bps hike to 0.85% in its June meeting and hinted at more tightening ahead. Compared to Australia, New Zealand’s inflation appears to be more entrenched which means that the RBNZ could be more hawkish for a longer period of time. However, both currencies remain vulnerable to China’s slowdown and external risk factors. Meanwhile, strong domestic growth in Canada and a hawkish BOC could buoy demand for the Loonie. In the coming week, key publications include the RBA’s interest rate decision, where we could see a 50bps interest rate hike, alongside retail sales and building permits data which should reflect resilience in Australia’s economy. Canada’s jobs data and RBNZ’s statement of Intent would shed light on how the central banks intend to balance growth and inflation, as well as interest rates prospects going forward.

4. Oil prices eased from its high before closing at around $108 per barrel on Friday as slowdown fears sapped global demand for oil. A strong US Dollar, backed by an aggressive Fed is also weighing on oil prices. However, the downside in oil prices remains capped, supported by persistent supply constraints and China’s gradual easing of its virus restrictions. Supply disruptions in Libya, OPEC+’s production capacity and anticipated shutdowns in Norway have also compensated for some of the decline in the oil market. On the other hand, gold prices dipped towards $1800 an ounce on Friday as the dollar-denominated asset suffered on the back of a stronger Dollar. While gold serves as a traditional hedge against inflation, prospects of higher interest rates reduce the appeal of holding the non-yielding bullion.

Salzworth Asset Management