SW Weekly Market Update 1

Weekly market update 31 October – Dollar rebounded with positive economic data, investors look forward to Fed policy meeting next week

Weekly market update 31 October – Dollar rebounded with positive economic data, investors look forward to Fed policy meeting next week

1. The Dollar edged higher to 94.2, nearing its one year high of 94.6, supported by bets that rising inflationary pressure will force central banks to scale back their pandemic triggered monetary support more quickly than they initially planned to. S&P and Nasdaq notched to fresh highs while US 10Y Treasury yield extended gains to 1.6% on Friday, boosted by the risk-on market sentiment. On the data front, initial jobless claims fell to 281 thousand, recording a fresh 19 month low while personal spending in the US also surprised, with a month on month increase of 0.6%, beating market forecasts of 0.5%. GDP on the other hand came below expectations at 2% but had little impact on the Dollar as traders set their sights on the Federal Reserve policy meeting in the coming week. The Federal Reserve is expected to announce plans to scale back on its $120 billion in monthly bond purchases, a first major step away from the accommodative monetary policy.

2. The Euro dropped more than 1% as October drew to a close, weighed down by a stronger greenback. Investors are still digesting the slew of information that was provided by the European Central Bank’s statement and press conference on Thursday, as well as Eurozone GDP and inflation rate. The ECB kept its monetary policy unchanged and maintained its position on interest rates, holding onto the view that higher inflation is temporary and will fade throughout 2022. This comes as Eurozone inflation rate data rose to 4.1%, a fresh high above market forecasts of 3.7%. Going into November, investors are expecting the ECB to continue providing favorable financing conditions, despite the recent spike in consumer prices due to ongoing supply bottlenecks and an unprecedented energy crisis. On the other hand, the Sterling outperformed against the Dollar, amid expectations the central bank will be hiking interest rates this year. Finance Minister Rishi Sunak remarked that the British economy is expected to see growth accelerating faster than expected in 2021, while also revising down projections for unemployment rate and budget deficit. For the coming week, investors will be watching the Bank of England’s (BoE) monetary policy report closely, for guidance on the monetary policy going forward into the latter part of 2021. While the Bank of England will probably leave monetary policy unchanged, traders will turn their focus to the minutes of the meeting after Governor Bailey signaled that the BoE is gearing to raise interest rates in October.

3. The Aussie strengthened and steadied around 0.7540 against the greenback, amid the strong surge in bond yields, sky-rocketing to 0.75% after the Reserve Bank of Australia (RBA) declined to defend its 0.1% target for the key April 2024 bond, stoking bets of an early interest rates hike. While the RBA reiterated commitment to keep interest rates low until 2024, markets are challenging their dovish stance as supply bottlenecks and surging energy prices are causing higher inflation worldwide. Recent data showed Australia’s core inflation rate jumped to a six-year high of 2.1% last quarter, hitting the RBA’s target band of 2-3% two years earlier than policy makers had expected. Meanwhile, the Canadian dollar strengthened to 1.23 against the U.S. Dollar as well, after the Bank of Canada pivoted to a more hawkish tone and indicated that they could be raising interest rates as soon as April 2022. Gold prices were hit by the rebounding U.S. dollar and rising Treasury yields, eventually dropping more than 1% to below $1,785 per troy ounce before the end of October. Crude oil saw a rise in prices to $83.57 a barrel before the end of the week, fuelled by the shortages in oil and natural gas in Europe and Asia, as well as OPEC+ nations keeping oil supplies tight throughout the month of October.