Weekly Market Update 30 January – Dollar ranges as markets await rate hike decisions from major central banks this week
Weekly Market Update 30 January – Dollar ranges as markets await rate hike decisions from major central banks this week
1. The Dollar ranged between 102.50 and 101.50 last week, as traders await the Fed’s rate hike decision due on Thursday. The US economy remains strong, with q/q advance GDP exceeding market forecasts of 2.6% to grow by 2.9%. On the inflation side, last week’s m/m core PCE Price Index, the Fed’s preferred inflation measure, cooled to 0.3%, while the y/y reading of 4.4% was a drop from last month’s 4.7% and the lowest since October 2021. Fed officials remain divided over whether to downshift to a smaller 25bps hike this week, or to continue with the current pace of 50bps. However, the market is expecting a more dovish Fed, as GDP continues growing while inflation eases. Markets are currently pricing in a 95% probability of a 25bps rate hike this week, a terminal rate below the Fed’s projected 5%, while also expecting the Fed to cut rates later in the year. This divergence between the markets and the Fed’s stated policy could be rectified at the FOMC meeting on Thursday.
2. Euro pared midweek gains to close at $1.08 against the dollar. Earlier last week, the Euro was buoyed by positive data regarding consumer sentiment and purchasing managers’ index (PMI). Consumer confidence increased from -22.2 to -20.9 in January, the highest level since February 2022. The business sector and services sector both grew for the first time since last June and July respectively. S&P’s Global Eurozone Composite PMI increased to 50.2 from last month’s 49.3, while S&P’s Global Eurozone Services PMI increased to 50.7 from last month’s 49.8. However, growth in lending, to both households and businesses, slowed to 3.8% and 6.3% respectively, as higher borrowing costs bit. Markets are expecting the ECB to raise rates by 50bps at this week’s meeting.
3. The Sterling rallied from a midweek low of $1.22 to close the week nearly flat, at $1.24 to the dollar. UK business activity shrank at the fastest rate in two years, as the PMI for the manufacturing and services sector posted numbers of 46.7 and 48.0 respectively. Markets then increased the probability of the BoE increasing rates by 25bps instead of 50bps at their policy meeting this Thursday, causing the pound to weaken. Still, the sterling remains supported by the weak dollar, as market expectations are high for the Fed to raise rates by 25bps.
4. The Kiwi Dollar rose to 0.65 before paring some gains to close the week at 0.64. Data released last week showed that inflation was slowing, with q/q CPI posting at 7.2%, below the RBNZ’s forecasted 7.5%. The market is starting to price in a rate hike of 50bps instead of 75bps at the RBNZ’s next meeting in February. This week will see more data released on employment numbers and the unemployment rate, which could affect how the Kiwi Dollar moves. The Aussie Dollar rallied to end the week at 0.71, on the back of higher-than-expected inflation and China’s re-opening. Inflation jumped to 7.8% y/y, the highest since 1990, causing markets to raise the odds of the RBA implementing a 25bps hike in February. Elsewhere, the Loonie fell to a low against the greenback, with USD/CAD trading at 1.33. The BoC indicated an end to its tightening cycle, if economic conditions did not deviate from its outlook. A GDP forecast is due on Tuesday, which could show how the economy is reacting to the current tightening cycle.
5. Brent crude oil prices pared gains to close the week at $86 per barrel, down from highs of $89. Traders expect increased demand from China after the world’s top crude oil importer stated over the weekend that consumption would be encouraged to stimulate economic recovery. At the same time, Russian oil supply remained resilient even after sanctions from the West, although there remain supply risks after Israel launched a drone strike on a target in Iran over the weekend. Gold ended the week flat at below $1930 per ounce, as investors await this week’s Fed policy meeting on the size and direction of rate hikes. Expectations are for the Fed to downshift to a smaller 25bps rate hike, which could push gold prices higher.
