Weekly Market Update 9 January – Dollar pared recent gains after a midweek peak to trade below 104

Weekly Market Update 9 January – Dollar pared recent gains after a midweek peak to trade below 104

1. Dollar pared recent gains after a midweek peak to trade below 104. After the New Year’s break, the Dollar rose after traders returned to the market. However, the outlook remained weak, causing the Dollar to trend downwards till a stronger-than-expected non-farm employment report from the ADP. Expectations were for 152k jobs to be added, down from the previous month’s 182k, which the market exceeded with 235k added jobs. More good news followed, with unemployment claims of 204k, a drop from last month’s 223k and a reversal in direction from the predicted 230k. With signs that the economy was picking up steam, portending a more hawkish Fed, traders piled in to push the Greenback up to 105.6. However, ISM’s PMI of 49.6 on Friday took the wind out of the rally’s sails, posting much lower than the forecasted expansion of 55.0, while also indicating that purchasing managers in non-manufacturing industries expected a contraction. The market recalibrated its expectation of a more hawkish Fed, with traders expecting smaller rate hikes, causing the Dollar to end the week just slightly higher. For the upcoming week, investors should pay attention to Fed chair Jerome Powell’s speech on Tuesday at Riksbank’s International Symposium in Stockholm, for clues about whether the Fed will continue to maintain the current pace of rate hikes. Investors should also look to Thursday’s core CPI release by the Bureau of Labor Statistics, projected to be 0.3%, up from last month’s 0.2%, because higher-than-expected inflation is likely to cause a more hawkish Fed.

2. Euro traded at around $1.05 against the greenback as investors digested the latest inflation data for the Eurozone, which showed that price pressures eased more than anticipated. The annual inflation rate in the Eurozone reached a four-month low, while inflation decreased in Germany, France, Italy, and Spain due to a decrease in energy costs. Consumer price growth in the bloc slowed to 9.2% in December from 10.1% a month earlier, below forecast for 9.7% in a Reuters poll. However, this decrease was largely due to lower energy prices, while other key components of core inflation, such as services and non-energy industrial goods increased. This raised concerns that price growth in the Eurozone may be more persistent than previously thought. The dip in inflation might also be attributed to temporary measures such as government subsidies where we could see inflation accelerate again in January. In light of this data, it’s unlikely that the European Central Bank’s (ECB) monetary policy will change in the near term, with another increase in borrowing costs expected next month. ECB Governing Council member Francois Villeroy de Galhau suggested that the ECB should aim to reach its terminal rate by the summer and maintain that level for a sustained period in order to curb inflation.

3. Despite the recent weakness of the US dollar, the value of the British pound hovered close to its one-month low of $1.197 which can be attributed to ongoing uncertainty about the outlook for monetary policy for both the Federal Reserve and the Bank of England. While the Fed signaled plans to keep interest rates at higher levels for an extended period, the BoE suggested an end to its tightening path due to an anticipated recession in the UK economy and the recent peak in inflation. In addition, warmer weather in the region contributed to lower natural gas prices, which helped to ease inflation expectations. On the data front, flat PMI data pointed to little change in economic activities in the UK, leading to a lackluster movement in the Sterling.

4. The value of the Canadian dollar strengthened against the US dollar on Friday after domestic data showed a significant increase in employment in December. The Canadian economy gained 104,000 jobs last month, far exceeding expectations, and the unemployment rate unexpectedly declined to 5%. This led to an increase in bets on further tightening by the Bank of Canada, with money markets now seeing a 75% chance of a quarter-point interest rate hike at the central bank’s next policy meeting on January 25th. This is up from a 64% chance before the data was released. The Australian dollar appreciated past $0.69, reaching its strongest levels in over four months due to a combination of factors, including a general weakness in the US dollar and China’s decision to lift some restrictions on Australian coal exports. The Reserve Bank of Australia’s efforts to reduce inflation through interest rate hikes also supported the currency’s rally. There is debate among markets about whether the RBA will continue to raise rates at its February 7th meeting, though higher rates are expected later in the year. Elsewhere, New Zealand Dollar rose past $0.635, hitting its highest levels in three weeks due to a general weakness in the US dollar, improved market risk appetite, increased demand for commodities, and the Reserve Bank of New Zealand’s efforts to raise interest rates.

5. Oil prices pared recent gains last week to trade below $77 per barrel as an improving demand outlook and possibility of a less aggressive monetary tightening from the Federal Reserve limited its downside. China’s economic growth is expected to rebound quickly and return to its normal path with the help of financial support from the government for households and private companies as the country eased Covid-19 measures. In the US, slower wage growth and a contraction in services activity have tempered expectations for aggressive rate hikes by the Federal Reserve, which is also supporting the price of oil. Elsewhere, gold price extended its rally to trade above $1880 per ounce on the back of the Dollar’s weakness and expectations of Fed moderating the pace of its tightening cycles following slower wage growth and contraction in the US service industry. However, minutes from December’s FOMC meeting showed that policymakers remained committed to raising rates to combat inflation, with projected terminal rates at 5.1% this year, which could limit the bullion’s upside in the near term.