Weekly market update 6th May – Dollar maintains its strength after Fed’s interest rate hike, risk-on currencies continue to dip
Weekly market update 6th May – Dollar maintains its strength after Fed’s interest rate hike, risk-on currencies continue to dip
1. The Dollar Index eased to the 103.6 level after reaching a 20-year high at 104 earlier in the week as investors held their bets on further tightening by the Federal Reserve in efforts to keep inflationary pressures under control. Last Wednesday, the Federal Reserve hiked its benchmark overnight interest rates by 50 basis points, which was its biggest jump in 22 years. Fed chair Jerome Powell reassured investors that the Federal Reserve will keep inflation under control as much as possible, but indicated that a 75 basis point hike would not be considered in the foreseeable future. Additionally, nonfarm payrolls showed that the U.S. economy added 428,000 new jobs in April, which was higher than expectations of 391,000. This was the 12th consecutive month of improvements above 400,000 in the U.S. jobs market. In the coming week, investors will be looking out for CPI data as a critical gauge on how serious inflationary pressures are in the U.S. in the current climate.
2. Euro continued to hold below the 1.06 level against the much stronger greenback and remained little changed over the week. This comes after the interest rate hike by the Fed and lingering concerns over how the Russian-Ukrainian crisis will affect the European regional crisis. Additionally, expectations that the ECB will be lagging behind the Federal Reserve in monetary policy tightening make the Euro less attractive compared to the U.S. dollar. Going forward, investors will be looking out for ECB President Lagarde’s speech for any indications on monetary policy directions in the coming months.
3. On the other side of the Atlantic, the Sterling similarly depreciated against the stronger U.S. dollar, breaking below the $1.24 level and losing 2% over the week. The BOE expects that the U.K. economy will stagnate in the second quarter of 2022, while also pointing to a 1% drop in GDP in the final quarter after the subsequent increase in energy prices. In the current gloomy economic climate, the relatively more risk-on British pound is expected to continue underperforming against the safe-haven dollar. In the coming week, investors will be looking out for preliminary GDP releases to have an idea of how the U.K. economy is faring.
4. Commodity currencies generally underperformed yet again, with the Aussie weakening past the $0.71 level and the Kiwi also holding below the $0.65 level before the week came to a close. This comes even as the RBA took a surprisingly hawkish turn in monetary policy direction with a larger-than-expected 25 basis point rate hike at the beginning of May. With higher expectations of inflation revised upwards by the RBA, markets are pricing in another quarter-basis-point hike in June to 0.6%. The Loonie also weakened similarly past $1.28 against the stronger greenback. With Canadian unemployment coming in at a record low of 5.2% in April, general expectations are for the Bank of Canada to maintain its hawkish stance going forward.
5. WTI crude futures saw its second consecutive week of increases as it gained 1.4% to settle at $109.70 before the week ended. This comes ahead of the impending embargo from the European Union against Russian oil, which outweighed uncertainties about global economic growth and weak demand for the commodity. Additionally, OPEC also appears reluctant to release more supplies of oil into the market, instead opting to stick to the current strategy of gradually reducing record supply cuts. Investors will be watching out for the OPEC meetings next week for any indications of a shift in their stance moving forward. On the other hand, gold prices saw a dip of about 1% as prices held around the $1,882 level. With a rebound in the U.S. dollar and Treasury yields, gold prices will continue to be under pressure as investors continue to bet on further Federal Reserve tightening.
