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Weekly market update 4th June – Dollar resumes its rally, supported by robust US jobs report

Weekly market update 4th June – Dollar resumes its rally, supported by robust US jobs report

1. The Dollar index surged to above 102 on Friday, posting its first weekly gain in three weeks after US jobs report revealed that more jobs were added in May than expected. The US economy added 390,000 jobs in May, the fewest since April of last year but above market expectations of 325,000 and showed that the economy is 0.5 percent behind its pre-pandemic level. Meanwhile, May’s unemployment rate in the United States remained at 3.6 percent, the lowest since February 2020, unchanged from the previous two months and wage growth grew at the same pace as the previous months. These data showed that the labour market remained resilient to Fed’s interest rates hikes and assuaged fears that the aggressive moves could tilt the economy into recession, opening the door for further hikes until inflation abates. Policymakers also signalled that the central bank could keep hiking rates, beyond the 50 basis point hikes expected in June and July to rein in inflation. In the coming week, investors will be keeping a close watch on the May CPI reading which should hold steady at 8.3% in May, suggesting that inflation could be peaking.

2. Euro could not hold its gains against the greenback towards the end of the week as a robust US jobs report buoyed demand for the Dollar. On the data front, Retail sales in the Eurozone disappoint with a 1.3% month-over-month decline in April of 2022, below market forecasts of a 0.3% rise. Meanwhile, annual producer inflation in the Eurozone surged to a new record high of 37.2 percent in April 2022, up from 36.9% in March and its annual inflation rate jumped to 8.1 percent in May 2022, a new high, up from 7.4 percent in the previous two months and well above market expectations of 7.7 percent. Excluding energy, inflation rose to 4.6 percent from 4.1 percent, more than double the European Central Bank’s target of 2%, suggesting that inflationary pressures in Europe have not yet peaked and bolstered the case for the ECB to begin tightening faster. In the coming week, ECB’s monetary policy meeting will be watch closely with markets anticipating the end of its asset purchase programmes alongside further clues of a 25 basis points rate hike in July. Elsewhere, Sterling extended its decline against the greenback as the country grapples with surging inflation and slower growth. It is a light calendar week for the Pound with final services PMI and consumer inflation expectations in the spotlight.

3. Aussie traded around 0.725 against the greenback on Friday, buoyed by prospects of higher interest rates by the RBA in the coming week. The RBA’s May meeting minutes revealed that the board is willing to hike the cash rate by larger increments at future meetings in order to rein in inflation, with traders pricing in an 80% chance of a 40 basis point hike. The economy remained resilient to rising prices, supported by robust domestic growth as its recent GDP data recorded 0.8% growth in the first quarter of the year, ahead of 0.6% expectations. The currency also remained vulnerable to Chinese trade data, with China being one of Australia’s largest trading partners. In the coming week, consumer and producer inflation data, Caixin Services and Composite PMIs for May should provide further insights on impact of the lockdown on China’s growth. On the other hand, Loonie climbed to its best level in almost a month against the greenback, riding on the back of rising oil prices and aggressive tightening by the BOC. In its latest monetary policy meeting, the BOC raised its benchmark policy rate by half a percentage point to 1.5 percent to curb rising inflation and indicated that the tightening cycle will continue with further rate hikes in its upcoming meeting. In the coming week, the employment change and unemployment rate data will provide further insight as to how the labour market is doing.

4. WTI crude futures soared above $120 per barrel as Saudi Arabia boosted pricing for its petroleum sales in July, underlining limited global supplies despite OPEC+ agreeing to boost output over the following two months. Saudi Arabia increased the official selling price of its trademark Arab light oil intended for its primary Asian market and northwest Europe, while keeping the premium on barrels bound for the United States unchanged. OPEC+ decision to increase output by 648,000 barrels per day in July and August, or 50 percent more than previously planned did little to tame rising prices. Elsewhere, gold prices extended their losses to trade below $1860 an ounce on Friday as prospects of higher interest rates and a stronger greenback limit the bullion’s upside. That said, it remains a traditional hedge against inflation and global uncertainty.

Salzworth Asset Management