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Weekly Market Update 4 November – Dollar rallied after rate hike announcement but could see downside in the new year after dovish remarks from the Fed

Weekly Market Update 4 November – Dollar rallied after rate hike announcement but could see downside in the new year after dovish remarks from the Fed

1. Dollar rallied across the week on the back of a 75 bps rate hike announcement by the Fed reaching a peak of 112.9, before paring gains to conclude at 112.5 by Friday. The fourth consecutive rate hike came in line with market forecasts amidst hot inflationary pressure. However, dovish statements from Chair Powell who suggested a slowdown in the pace of rate hikes as soon as the next meeting indicates a potential shift in policy that could weigh down on the Dollar’s ascent in 2023. Investors are currently betting on another 50 bps rate hike in the December meeting after signals from the Fed that rates in the US would reach a higher peak than previously expected created mixed sentiments. Recent data released on US economic conditions indicate relatively stable results. Unemployment was at a healthy rate of 3.6%, unemployment claims of 217K were in line with market expectations, while JOLTS job openings beat market expectations by a million extra openings at 10.72M. However, labour statistics are lagging indicators of economic performance. PMI data in contrast is an indicator on the prevailing direction of economic trends, and the recent results suggest a pessimistic outlook for the US economy which could weigh down on the Dollar’s ascent. Manufacturing PMI hovered only just above contraction at 50.2, extending its declining trend since April last year. Likewise services PMI of 54.4 was lower than market expectations of 55.5 and continued to edge closer to contraction. The macro headwinds are consistent with Chair Powell’s dovish statements, and contribute to the view that the Fed is likely to slow the pace of race hikes next year in line with the evolving economic outlook.

2. The Euro pared a week of losses to attain near parity with the Dollar at 0.99 on Friday after dovish statements from the Fed dampened the Dollar’s appeal following expectations that the trend of rate hikes could pivot in 2023. Statements from President Lagarde on Tuesday reinforced the ECB’s commitment to raising interest rates even if the probability of a eurozone recession has increased amidst rising inflationary pressure. Core CPI flash estimate for the euro area stood at 5%, extending its uptrend since July last year and surpassed market expectations by 0.2% while headline inflation hit a record 10.7% in October, well above the ECB’s target of 2%. A gloomy economic outlook accompanied by rising prices with recent data indicating that the region’s third quarter GDP growth slowed sharply to 0.2%, while a Composite PMI of 47.3 represented the fourth consecutive month of declining private sector activity and the sharpest since November 2020 could limit the Euro’s upside. In the week ahead, investors should anticipate the EU economic forecast release on Friday which will factor into market expectations for the ECB’s next interest rate announcement in December. Meanwhile, Pound closely followed the Euro to pare a week of losses, reaching above 1.13 against the dollar on Friday after dipping to a low of around 1.11 on Thursday. This follows a BoE rate hike by 75 bps to 3%, representing the most significant rate increase since 1989 amidst stubbornly high inflation. However, policymakers also acknowledged that the UK had already entered a recession and noted that interest rates are likely to increase to a lesser extent than current market expectations. Rising costs of living and a weakening resolve for higher rate hikes could extend the Pound’s decline in 2023.

3. Commodity currencies rallied on Friday following similar patterns elsewhere as investors sold off the Dollar. Aussie appreciated above 0.645, Loonie above 0.740, and Kiwi above 0.590. Recent dovish statements, and anticipation that looming economic contraction will force the Fed to capitulate from its hawkish monetary policy in the new year could reverse the prolonged decline of the commodity currencies. In particular, the Aussie was propped up following a 25 bps hike to 2.85% by the RBA which signalled further monetary tightening amidst hot inflationary pressure. However, the RBA also forecasted inflation to peak at 8% by the end of the year and decline in 2023, which could weigh down on the Aussie’s recovery. The Kiwi and Aussie are expected to suffer from further headwinds as the export dependent economies see weaker demand from China. The recent Party Congress saw the Central Committee reiterate its unwavering zero-covid policy and offer few plans to rescue the real estate slump which has slashed demand and prices for commodities such as steel, a major export component for Australia.

4. Brent crude extended its rally to a new high above $98.57 per barrel on Friday since dipping to $81.3 in September. Oil prices have been weighed down by declining demand from China, the world’s top crude importer. Despite the official zero-covid stance, unconfirmed market rumours from a former Chinese disease control official on Friday indicating that substantial changes on its strict covid policy which could be announced soon also buoyed prices for oil. Upcoming events such as OPEC+’s 2 million output reduction in effect this month, and the EU ban on Russian oil set to take effect in December, will continue to keep upward pressure on oil prices in the near term. Meanwhile, Gold rallied on Friday to above $1680 per ounce as the dollar-denominated asset corresponded closely with a dip in the Greenback on the same day.


Salzworth Asset Management