Weekly Market Update 6 March – Dollar consolidates at 104, as markets await Powell’s testimony and Friday’s jobs report
Weekly Market Update 6 March – Dollar consolidates at 104, as markets await Powell’s testimony and Friday’s jobs report
1. The dollar index ended the week at 104.5, below last week’s high of 105.3, to register the first weekly loss since January. Investors were optimistic about the Fed being dovish, as they zeroed in on non-voting FOMC member Bostic’s remarks that a pause in rate hikes was on the cards, despite Bostic acknowledging that rates might need to go higher. Bostic was the sole dovish voice among the Fed officials who spoke last week, compared to fellow non-voting FOMC member Daly, or voting members Kashkari and Waller. Daly was quoted saying “further policy tightening, maintained for a longer time, will probably be necessary”, while Kashkari said “the risk of undertightening is greater than the risk of overtightening”, before Waller’s prepared remarks indicated recent data had made him question whether the FOMC had made a dent in inflation. Fed Chair Powell is also expected to echo his colleagues’ hawkish tone as he testifies before Congress this Tuesday and Wednesday, which are likely to be his final public appearances before the next FOMC meeting this month. Traders are pricing in a 25% chance of a 50bps rate hike then. Friday will also see February’s non-farm employment numbers released, which should give traders information on the labour market’s strength, especially after January’s extraordinarily high 517k figure.
2. The euro rose to $1.06 against the dollar, as inflation ticked up from the previous reading. Core y/y CPI increased from 5.3% to 5.6%, above market expectations, while y/y CPI came in at 8.5%, a decline from last month but also above market expectations. Consumer prices in France and Spain also came in higher than expected, likewise for inflation in Germany. ECB President Lagarde spoke about inflation remaining persistent in the short-term, with more rate hikes probable. She flagged this month’s ECB meeting as extremely likely to conclude with a 50bps rate hike. She is due to speak again this week, at a WTO discussion in Geneva, which might give markets more insight on the ECB’s rate path moving forward.
3. The sterling gained to reach $1.20 against the dollar, despite dovish remarks from BoE Governor Bailey that the UK was dealing with inflation better than her peers. Bailey highlighted that the BoE was neither committed to a stop in rate hikes, nor further rate hikes, with the BoE happy to continue monitoring the impact of previous rate hikes on the economy. Markets shrugged off his comments, pricing in a peak rate of 4.75%, compared to 4.25% back in early February. GDP data is due this Thursday, which would show whether there remains further room for rate hikes.
4. The commodity currencies ranged against the dollar. The Aussie continued moving sideways at $0.67 to the dollar, after last week’s lower-than-expected y/y CPI data, which fell a full percentage point from last month to hit 7.4%, below the RBA’s forecasted 8.1%. The q/q GDP also grew slower than expected, 0.5% instead of the forecasted 0.8%. Expectations are for the RBA to increase rates by 25bps at this week’s meeting, while China’s latest relatively low 5% growth target might weigh on the Australian economy. Elsewhere, the Kiwi remained at $0.62 against the dollar, as RBNZ Governor Orr said that inflation and employment remain too high for the RBNZ’s liking, entailing further tightening. Still, the Kiwi is likely to experience selling pressure in the short-term due to the lack of stimulus from the Chinese government. For USD/CAD, price ranged about $1.36, as the Canadian economy shrank. The m/m GDP fell from 0.1% to -0.1%, below expectations of a stall, which supports bets of a pause in rate hikes by the Bank of Canada this week. More economic data is expected this week, such as the change in employment and unemployment rate, which are forecast to decline and rise respectively.
5. Brent crude rallied to $86 per barrel, as market watchers expect a shortage in the later half of this year. Even though China’s government has pencilled in a 5% growth rate for this year, demand is still picking up, especially as manufacturing PMI posted its strongest numbers since 2012. International travel is expected to rebound as travel restrictions ease. At the same time, supply is forecast to remain mostly unchanged, as Russia’s oil exports remain under sanction, while US production is slowing and OPEC continues to maintain its same production levels from last year. Gold rallied higher to $1856 per ounce, as expectations of the Fed turning dovish grew stronger, contrary to the hawkish signals from Fed officials. Still, with Fed Chair Powell expected to testify in front of Congress this week, and employment data out Friday, there could be downside risks to the price of gold.
