Weekly Market Update 31 December – Dollar outperformed its major peers for 2021, hawkish pivots by major central banks alongside prospects of higher interest rates are main themes stepping into 2022
Weekly Market Update 31st December – Dollar outperformed its major peers for 2021, hawkish pivots by major central banks alongside prospects of higher interest rates are main themes stepping into 2022
1. The Dollar hovered around the 96 level at the end of December, which is its closest level in the past 4 weeks. Yet, the U.S. dollar is set to gain 7% over the past year, which is its largest gain since 2015. This comes amid expectations that the Federal Reserve will be tightening monetary policy much faster than other central banks given that the U.S. economic recovery has been strong and robust, with prospects of three interest rate hikes in 2022. Policymakers have been raising concerns over rising inflationary pressures, and the Fed has announced that they would end its pandemic-era bond purchases in March. Stepping into 2022, investors will be watching out for the FOMC meeting minutes on Wednesday for further insights into Fed’s first interest rate hike. In addition, investors will await the first release of nonfarm payrolls in 2022 at the end of the week to gain a better understanding of the U.S. labour market, which has been steadily recovering.
2. The Euro appreciated against the greenback in the last week of 2021, but remained under pressure amid concerns over Europe’s slowing economic growth and re-emergence of COVID-19 restrictions across several countries. The European Central Bank is also expected to tighten its monetary policy much slower than the Federal Reserve, and earlier this month it announced a slowdown in its pace of asset purchases. Moving forward, the Euro is likely to weaken against the dollar until economic growth picks up again in 2022. For the coming week, final services PMI data will be released for several countries in the European bloc. Similarly, the pound appreciated against the dollar at the end of 2021, but remained weak against the greenback, against which it is set for an annual loss of 1.5%. Concerns about the U.K. economic recovery were further intensified given the inflationary pressures on energy prices, record rises in COVID-19 cases due to the spread of the Omicron variant and post-Brexit tensions over the Northern Ireland protocol. Going into the week, investors will be looking out for final services PMI and the Halifax HPI which will be released near the end of the week.
3. The Aussie appreciated against the greenback in the last week of 2021, gaining 0.25% over the week. The Reserve Bank of Australia maintained its position to keep interest rates low in 2022 along with its ultra-loose monetary policy until inflation is sustainably within the 2-3% range. The Kiwi, however, depreciated against the U.S. Dollar, falling to $0.685 at the end of 2021 on the back of a stronger Dollar, amid expectations of higher U.S. interest rates. The emergence and spread of the Omicron variant also exacerbated the risk-off sentiment in the market as 2021 came to an end. The Canadian dollar outperformed most of the major currencies such as the Euro, Pound and Yen, corresponding with the strong annual performance of crude oil prices. This came amidst a strong economic rebound that allowed the Bank of Canada to pull back on its pandemic support and suggest interest rate hikes in 2022. Gold held at about $1,830 per ounce at the year’s end. Annually, gold prices saw a 4% decline, as strong post-pandemic economic recovery and inflationary pressures prompted many major central banks to tighten its monetary policy much sooner with prospects of higher interest rates, thereby dampening the appeal of the non-yielding asset.