Weekly market update 4 February – Dollar retreated from January’s high following strong NFP results, commodity currencies rebounded from lows as traders scaled back on Fed hawkish bets

Weekly market update 4th February – Dollar retreated from January’s high following strong NFP results, commodity currencies rebounded from lows as traders scaled back on Fed hawkish bets

1. The Dollar rebounded back to above the 95 level after a sell-off occurred over the week as investors reassessed the outlook on monetary policy going forward. In the most recent release of nonfarm payrolls, 460,000 new jobs were added to the U.S. jobs market, outperforming market expectations of only 150,000 jobs and affirming the strong recovery of the U.S. labour market. However, the White House warned that the data might not be as strong as anticipated, since the peak of omicron-related infections occurred at the same time as when the payroll data was being collected. Moreover, the Federal Reserve has made clear its plans to hike interest rates for 2022, thus lending strength to the greenback as a safe-haven currency going forward. In the coming week, investors will be watching the CPI and core CPI data release closely for clearer signs of inflationary pressures that could prompt the Federal Reserve to further tighten monetary policy or speed up its implementation. Unemployment claims data will also be released, possibly affirming the strength of the labour market, and several FOMC members are due to speak as well.

2. The Euro outperformed its peers in the past week, gaining over 2.5% over the week. This comes after the recently concluded ECB press conference, during which several policy makers took a more hawkish stance on monetary policy, with a general concern over inflationary pressures affecting the bloc. ECB President Christine Lagarde also ruled out keeping rates stable this year, saying that there will be “no pledges without conditionalities” as the ECB will carefully consider all conditions before making a firm decision on its monetary policy. The Sterling also benefited from the weakening of the Dollar over the week, hitting a two-week high of $1.363 before returning to around $1.355 before the week ended. More importantly, the Sterling appreciated after the BOE raised bank rates to 0.50% from 0.25% last week. BOE policy makers said that they will be starting to taper the central bank’s $875 billion quantitative easing programme. However, the outlook for both Euro and Pound remains mixed as the Dollar is expected to continue on its bullish trend, and could still outperform the two risk-on currencies. In the coming week, both ECB President Christine Lagarde and BOE Governor Andrew Bailey are expected to speak at events, and they will be watched closely by investors for any hints of their stance on monetary policy going forward.

3. Commodity currencies generally outperformed against the weaker Dollar over the week, as traders scaled back on overly hawkish bets on the U.S. dollar. The Kiwi edged higher to $0.67 and the Loonie traded above $1.275 against the U.S. Dollar to begin the month of February. However, the Aussie struggled to keep up with the bullish momentum, holding below $0.715 at the end of the week, as the Reserve Bank of Australia pledged to keep interest rates at record lows of 0.1% and, as expected, decided to end its bond buying programme. The RBA also raised its inflation expectations sharply, but wants to wait and see a lasting recovery in its labour market before choosing to raise interest rates. In the coming week, the respective heads of the central banks in Australia, New Zealand and Canada are due to speak, and these events will be watched closely for further guidance on monetary policy. On the other hand, U.S. crude prices surged to $93 per barrel, as oil production in the Permian Basin was disrupted by the massive winter storm that swept across the U.S.. In the recently concluded OPEC meetings, OPEC and its allies agreed to gradually release more barrels into a strengthening market so as not to shock oil prices too much with a surge in supply. Oil prices are expected to stay elevated as demand for crude oil recovers. Gold, however, dipped below $1,800 per ounce during the week but recovered above that level before the week ended. This comes after payroll reports showed a strong U.S. labour market that could possibly support further and more aggressive interest rate hikes from the Federal Reserve. The non-yielding asset could potentially see further downside going forward.