Weekly Market Update 3 April – Dollar extended its decline to trade around 102.6 as peak rate nears and banking fears fade, while investors remain unconvinced of the US economy’s strength
Weekly Market Update 3 April – Dollar extended its decline to trade around 102.6 as peak rate nears and banking fears fade, while investors remain unconvinced of the US economy’s strength
1. The US dollar slumped against a basket of currencies before paring losses at the week’s end, hitting 102.6 from a low of 102.1. Crucial economic indicators were released last week, which painted a picture of a slowing US economy. GDP q/q growth was forecasted to remain stagnant at 2.7%, but fell to 2.6%, while unemployment claims ticked up to 198k from the previous reading of 191k, exceeding an estimated 196k. Adding on to the concerns was the Fed’s preferred inflation metric, the core PCE price index, falling to 0.3% from the previous reading of 0.6%, below estimates of 0.4%. Markets are currently giving a more than 50% chance of the Fed raising rates by 25bps in May, while expecting at least 60bps in rate cuts by the end of this year. The dollar’s price is expected to remain volatile, especially while the market continues to diverge from the Fed in its rate curve predictions. This week, more economic data is due, with employment data being closely watched for signs of the US economy’s continued strength.
2. The euro rallied to a high of $1.09 against the dollar, then pared gains before closing the week at $1.08. The euro was buoyed by hawkish remarks by the ECB, while Germany’s m/m CPI came in higher than expected, at 0.8% instead of the forecasted 0.7%. Core CPI y/y also rose to a record high of 5.7% last week, giving further credence to ECB policymakers’ claims that they are not done increasing rates.
3. The pound rose to a high last seen on 30 January this year, touching $1.24 against the dollar before weakening to $1.23 at the week’s close. The sterling was supported by BoE Governor Bailey’s prepared remarks on multiple occasions last week, where he reiterated that further monetary tightening would be necessary if inflation continued at its current pace. He also reassured the Treasury Select Committee that the factors leading to SVB’s or Credit Suisse’s collapse would not surface in the UK banking system, giving the BoE room for further rate hikes.
4. The commodity currencies gained against the greenback following the Dollar’s recent weakness. The aussie dollar broke above $0.67 before closing below it, as last week’s CPI y/y declined from the previous 7.4% to 6.8%, below market expectations of 7.2%. With inflation running cooler than expected, prices are consolidating before this Tuesday’s RBA meeting where rates could be raised by 25bps or kept constant. Elsewhere, the kiwi dollar touched $0.63 before paring some gains, after New Zealand’s main trading partner, China, posted barely-changed manufacturing numbers for March. Markets are expecting the RBNZ to raise rates by 25bps at this Wednesday’s meeting, after the previous inflation reading was unchanged from the preceding one. The loonie, however, rallied against the dollar, with USD/CAD falling to $1.35 on the back of the weak dollar. Last Friday also saw GDP m/m grow by 0.5%, exceeding expectations of 0.4% and last month’s contraction of -0.1%. Price might consolidate further this week, in anticipation of next week’s rate statement by the Bank of Canada.
5. Brent crude gained last week to close just shy of $80 per barrel, before Sunday’s decision by OPEC+ to cut oil production by more than 1 million barrels per day caused it to rally sharply to $84 per barrel at the start of this week. Before Sunday’s move, OPEC+ had not shown signs of changing their production levels, with markets expecting production to remain steady at the scheduled meeting on Monday. This move is expected to take effect next month, which could add to inflationary pressures around the world and cause problems for central banks that are trying to tackle inflation. Gold ended the week flat at around $1970 per ounce, as investors weighed the effects of the banking crisis earlier this month against the likelihood of further rate hikes by the Fed. Even though the Fed is nearing the tail-end of its hiking cycle, further inflationary shocks like OPEC+’s decision could push rates higher and erode gold’s attractiveness.
