Weekly Market Outlook

Weekly Recap: Dollar Hits 4 Weeks Low, Euro Higher as Inflation Surge

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It has been an interesting trading week despite the few data releases. The dollar index hit a 4-week low on Thursday as concerns rise about the labour market recovery. Meanwhile, the eurozone inflation surged to a 10-year high in August pushing the euro into new highs against rivals. Australian economic growth exceeded expectations in the Q2 defying the pandemic situation and lockdowns. 

Dollar Falls to 4-week Lows

The dollar index has been trading near its 4-week lows of 92.2 as investors began to suspect the continuity of labor market recovery. On Thursday, unemployment claims fell more than expected to a new pandemic low and the job cut fell to its lowest levels in 24 years. However, the ADP report showed that private employment grew much less than expected. The data hit the dollar badly as the Fed is focusing on the labor market recovery to set the timeline to monetary policy tightening in the US, as inflation is already set above target. 

Technically, the breach of the upside trendline accelerated the DXY falls heading to the next support levels at 92.00 followed by 91.50. On the upside, the index needs to regain the 93 levels to maintain its upside direction in the longer term. 

Dollar Index
The Dollar Index

Australian Economy Beats Expectations

The Australian economy expanded 9.6% in the second quarter of 2021 over the same quarter of the previous year. On a quarterly basis, the national GDP rose 0.7% in the June quarter, compared with a 1.9% increase in the first three months of the year, according to the Australian Bureau of Statistics. Recent growth data shows that the Australian economy has managed to bounce back from the COVID recession.

dollar Market News
Australian GDP

However, investors remain sceptical about the sustainability of recent growth as the country has been suffering from long lockdowns now. Economists expect that the true impact of lockdowns will be reflected on the third-quarter figures, in line with the RBA’s expectations. 

The Reserve Bank of Australia is scheduled to meet next week and is expected to keep the policy in place until the path of the economy becomes clearer. The bank kept interest rates unchanged at a record low of 0.1% during its August meeting. The policy statement acknowledged that the economic recovery has been stronger than was earlier expected. However, the recent COVID-19 outbreaks were interrupting the recovery, and GDP is expected to decline in Q3, it added. The RBA reiterated it will not increase the cash rate until inflation is within the 2 to 3% target range, a condition that will not be met before 2024. 

Eurozone Inflation at 10-year Highs 

The flash estimates of the Eurozone annual inflation rate show a 3% increase in August, from 2.2% in the previous month and above market expectations of 2.7%. These figures mark the highest inflation rate since November 2011, which could trigger some debate at next week’s European Central Bank policy meeting. Core inflation flash estimates refer to a 1.6% rise during the same month. 

The latest ECB meeting revealed that policymakers were only concerned about the implementation of the new strategy rather than the forward guidance. Back in July, the bank had its first strategy review since 2003, which included targeting inflation at, not near or close to, 2%.  The bank still sees inflationary pressures as transitory, with no plans to reduce policy stimulus for the horizon. Now markets are pricing for sooner tightening measures if inflation managed to rise sustainably to 2%.

Learn more about fundamental analysis

To learn fundamental analysis is highly effective for investors and forex traders. The main outcome of fundamental analysis is to determine the key factors which affect currency prices. With the news release and economic events the market response and if the future economic outlook is showing recovery or improvement, the currency should strengthen. As a trader is highly beneficial to master the basics of fundamental analysis and apply it in your trading strategies.

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