The U.S. dollar held steady and stayed towards the middle of recent ranges against major peers on Thursday, as investors digested comments from a host of Federal Reserve officials and critical consumer inflation data loomed for the following week.
US DOLLAR STUCK
Against the backdrop of rising U.S. equity futures and a more hawkish Reserve Bank, the risk-sensitive Australian dollar appreciated. Additionally, the New Zealand dollar rose. Transitioning to a federal funds rate between 5.00 and 5.20 percent John Williams, president of the New York Fed, stated at a Wall Street Journal event, “It seems a very reasonable assessment of what we’ll need to do this year to reduce supply and demand imbalances.” Williams’s remarks followed Chair Jerome Powell’s reiteration of the term “disinflation” on Tuesday, when he repeated his interest rate outlook.
The dollar index, which measures the U.S. currency against six rivals, fell 0.13% to 103.32, pulling away from the one-month high of 103.96 reached on Tuesday at the pinnacle of a rally following Friday’s stronger-than-anticipated employment report. In addition, 103 has supplied a stable floor all week. In his speech, Powell did not indicate that the Fed would adopt a more aggressive monetary policy stance in response to the employment figures. Tuesday’s report on consumer price inflation will be keenly scrutinized by investors for new policy indications. Christopher Wong, a currency strategist at OCBC, stated that the dollar’s rate of recovery was exhibiting tentative signs of slowing, but that the currency was still relatively supported by Fed indications that rate hikes will continue. “On the one hand, Powell’s remarks at the Economic Club of Washington the night before were less hawkish, but on the other hand, Fed officials such as Williams (and Fed Governor) Lisa Cook seized the opportunity to increase their hawkish rhetoric,” Wong explained.
Pricing on the market forecasts the Fed funds rate to peak just above 5.1% in July before declining to 4.8% by the end of the year. The euro advanced 0.18% to $1.07325, pushing away from Tuesday’s one-month low of $1.067, as it continued to find support from hawkish remarks made by two German officials at the European Central Bank on Wednesday (ECB). Tuesday, German central bank director Joachim Nagel told the German newspaper Boersen-Zeitung, “From where I stand today, we require additional, significant rate hikes.” His colleague Isabel Schnabel stated that it is not yet certain that the ECB’s current rate hikes will restore inflation to 2%. The Japanese yen was unchanged at 131.455 per dollar, while sterling was up 0.1% at $1.2087 per ounce. The Australian dollar increased 0.49 percent to $0.6958, while the New Zealand dollar rose 0.66 percent to $0.63485.
BRITISH POUND
Reuters: After Federal Reserve Chair Jerome Powell refrained to appreciably stiffen his tone on inflation, the pound strengthened versus the dollar on Monday, reviving predictions of a less aggressive U.S. monetary tightening. In a Tuesday question-and-answer session before the Economic Club of Washington, Powell reaffirmed his belief that a “disinflation” process was now happening, despite the extremely high U.S. job numbers from the previous week. “The stronger pound this morning is largely a spillover from last night’s improved risk environment,” said Simon Harvey, head of FX Analysis at Monex Europe. Harvey noted that the extent of the pound’s rise was mostly attributable to its underperformance on Tuesday, “so there is a bit of a catch-up effect.”
Sterling rose 0.34 percent versus the dollar to $1.2091 on Wednesday after hitting its lowest level since January 6 at $1.1961 on Tuesday. It increased by 0.16% to 88.89 pence against the euro after plunging to a four-month low against the single currency last week. Friday’s economic growth data will provide hints as to the Bank of England’s (BoE) next action, traders anticipate. Last week, the central bank boosted borrowing prices to 4% for the tenth time, but signaled that it was close to completing its string of rate hikes. Amid evidence of decelerating inflation, the money markets are currently pricing in a peak in BoE interest rates of 4.25 percent by the summer.
According to a study of recruiting businesses released on Wednesday, the British labor market showed some symptoms of cooling in January, with beginning salaries for persons hired for permanent positions rising at the slowest rate in nearly two years. Governor Andrew Bailey of the Bank of England, who will talk to MPs on Thursday about the central bank’s decision to hike rates to a 14-year high, stated this week that labor market data would be crucial in determining how rapidly inflation declines.
SOUTH AFRICAN RAND
Reuters: The South African rand strengthened versus a little weaker U.S. dollar on Wednesday as investors awaited potential news from Thursday’s State of the Nation speech by President Cyril Ramaphosa. At 06:50 GMT, the rand was trading at 17.5300 per dollar, approximately 0.2% higher than its previous close. Federal Reserve Chairman Jerome Powell’s less hawkish-than-anticipated remarks fueled investor hopes that the central bank may soon soften monetary policy. With no domestic economic news on Wednesday, South African markets were in a quiet prior to the president’s address to parliament, where he is expected to propose a solution to the nation’s increasing power issue.
Since last year, daily power outages have hampered economic progress in Africa’s most industrialized nation and are proving to be a critical test for the ruling African National Congress, whose popularity with the electorate is declining. ETM Analytics stated in a research note, “There is much at stake, and as a result, the USD-ZAR will tread water ahead of the speech before adopting a more meaningful direction afterward.” The brokerage noted that investors are demanding leadership, guidance, and transparency regarding the steps being taken to rescue South Africa from its electricity generation issue.
The yield on the benchmark government bond for the year 2030 increased by 2.5 basis points to 9.785% in early trading.
WORLD MARKETS
Reuters: Asian stocks mirrored Wall Street’s decline on Thursday, as a number of Federal Reserve speakers reinforced Chairman Jerome Powell’s prediction that interest rates will rise, dampening risk appetite, while the dollar held near one-month highs. The broadest index of Asia-Pacific shares excluding Japan on the MSCI fell 0.3%. Japan’s Nikkei also lost 0.3%. China’s blue chips decreased by 0.1%, while Hong Kong’s Hang Seng Index fell by 0.2%, while IT companies declined by 0.7%. Alphabet Inc.’s stock plummeted 7.7% on Wednesday after its new AI chatbot Bard provided an inaccurate response in a promotional video, pulling down the S&P 500 and Nasdaq by more than 1%. As the U.S. central bank continues forward with its efforts to control inflation, Federal Reserve officials have indicated that additional interest rate hikes are likely. None, though, suggested that January’s robust employment report could motivate more aggressive policy steps.
“Now that inflation has passed its peak and many central banks have begun to slow the pace of policy tightening, markets are once again scouring their communications for indications of the future,” said Jennifer McKeown, chief global economist at Capital Economics. “However, despite the strong push for transparency over the past two decades, central banks are struggling to convey the right message, with contradictory data adding to confusion about the inflation outlook in a world after the pandemic.” John Williams, president of the New York Fed, stated on Wednesday that going to a federal funds rate between 5.00% and 5.25% “seems like a very reasonable view of what we’ll need to do this year to reduce supply and demand imbalances.” Governor Christopher Waller stated that achieving the Fed’s inflation target of 2% “could be a long fight.” However, according to Governor Lisa Cook, the large job increases in January coupled with a moderation in pay growth bolstered prospects for a “soft landing.”
Janet Yellen, the U.S. Treasury Secretary, stated that while inflation remained elevated, there were hopeful indications that supply-demand imbalances were diminishing in several economic areas. Many investors were forced to readjust themselves in anticipation of a higher Fed funds rate peak after being caught off guard by the monumental January U.S. employment data. The yield on two-year Treasury notes, which rises as traders anticipate higher Fed fund rates, fell 2 basis points to 4.4375% on Thursday, while the yield on benchmark 10-year Treasury notes dropped 5 basis points to 3.6012%. Futures indicate that the Fed’s target rate will peak in July at 5.132%, 25 basis points higher than last week, and decrease to 4.813% by December, a 40 basis point increase from last week. On the currency markets, fluctuations were moderate. After last week’s astounding employment and services figures, the dollar index remained near a 1-month high at 103.45 against its major counterparts. Brent crude futures declined 0.2% to $84.90, while West Texas Intermediate (WTI) crude finished 0.1% lower at $78.36. Gold decreased somewhat. The spot price of gold was $1,872.48 per ounce.
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