Market Analysis

Dollar rising as Fed tightens

 

Last week was marked by the intensifying of the worries over inflation, with the UK in particular coming under the spotlight, with an annual cpi reading of 4.2%, which was well above expectations. Also on the radar of investors has been the rising number of Covid cases in Europe, with some countries re-introducing lockdowns. This is the ActivTrades weekly Outlook, where every Monday we analyse the economic calendar and identify key events, focusing on how they may impact the markets. Stay with us over the next few minutes, while I look into how the week is likely to unfold. I will cover a range of topics, including the publication of Eurozone PMI data, the Royal bank of New Zealand interest rate decision and the release of the last FOMC minutes.

 

The Eurozone has been under the spotlight recently, with its central bank officials maintaining a dovish posture, despite inflation in the continent largely exceeding the 2% target. Last week, Christine Lagarde, the head of ECB, confessed that at the last meeting central bank officials had discussed three things: Inflation, Inflation and Inflation. Still, Madame Lagarde also made it clear that there are no plans to hike interest rates, at least not until 2023. The situation in the continent remains uncertain, despite the strong recovery verified over the last few quarters. The number of Covid cases continues to rise, threatening a 4th wave of the pandemic. The dovishness of the ECB has been the main factor behind the weakness of the euro, which lost more than 1% to the dollar last week. So, the risk over the publication of euro PMIs is very much to the downside: a disappointing number is likely to further penalise the single currency, while a positive figure is unlikely to have much of an impact given the stance of the central bank.

On Wednesday, the Royal Bank of New Zealand will meet and decide on monetary policy, including over the country’s interest rate. Unlike other major central banks, the RBNZ has already started tightening policies and the consensus points at a new hike of 25 basis points to be announced. However, this move is, to a large extent, already baked into the value of the Kiwi dollar, which gained almost 4% to its American counterpart in the aftermath of the first hike, back in October. The general consensus in the markets is for rates above 2% by the end of 2022. Still, as US data continues to surprise to the upside, investors’ expectations of an imminent move to tighten by the Fed, is penalising the Kiwi, as could be seen last Wednesday when it lost 0.8% to the greenback, following the release of a batch of US data. So, any perception of dovishness from the Royal Bank of New Zealand could trigger further weakness for the antipodean currency.

We’ll end our weekly preview by zooming in on the release of the last FOMC minutes, happening also on Wednesday. The American economy is running hot, with year-on-year inflation exceeding 6% in October. A level not seen since 1990. There have been several senior voices within the Federal Reserve, like the President of the St Louis Fed, James Bullard, advocating that the central bank should start tightening sooner rather than later. Anxiety over rising prices is growing alongside the spectrum of Stagflation, an affliction not seen since the 1970s, with many fearing the return of a scenario where escalating prices coexist with low growth. So, the markets will be looking at the minutes of the last FOMC meeting with particular attention, trying to gauge the balance between doves and hawks withing the Fed’s monetary policy decision body. Hints of an imminent move to hike rates will be likely to create even more upside for an already rampant US dollar. Can’t wait to see those minutes on Wednesday!

 

Watch the video here.

 

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