Weekly Market outlook

Weekly Recap: USD higher as Fed ready to Taper, RBNZ keeps Rates on hold

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Fed officials see the possibility of reducing asset purchases as the economy continues its solid recovery, as the minutes for July’s meeting revealed. The Reserve Bank of New Zealand disappointed the kiwi traders by holding interest rates unchanged due to the uncertainty around the pandemic spread and lockdowns. 

USD at 9-month high after FOMC Minutes

The greenback edged higher after FOMC Minutes showed that the committee is ready to taper asset purchases later this year. The dollar index has reached 93.50 levels on Thursday, for the first time since November 2020. The Fed Committee acknowledged that if the economy was to evolve broadly as they anticipated, it is likely to reduce stimulus this year. With less cash injected into the economy, the dollar usually gets boosted. Now, market participants are penciling in a tapering announcement in the September meeting despite the uncertainty surrounding the covid-19 situation.

However, Fed’s officials stressed that there is no link between tapering and potential interest rate hikes. The main concern among the members was the latest inflation surge, while opinions varied widely regarding the potential path of the economy.

USD analysis - weekly forex analysis

On the data front, US retail sales fell 1.1% in July, following a revised 0.7% growth in June and compared with market consensus of only 0.3% drop. The drop was led by a decline in auto purchases while the resurgence of COVID-19 cases hit consumer demand badly. Unemployment claims fell for a fourth straight week to a new low since the pandemic of 348K in the week ending August 14th, confirming the continued recovery in the US labor market.

RBNZ Keeps Rates unchanged, but sticks to the Hawkish Tone

The Reserve Bank of New Zealand held interest rates at a record low of 0.25% during its August meeting, defying market expectations of a 25 basis points increase. The decision was largely affected by the recent local COVID-19 lockdown. However, policymakers still expect a hike before year-end to anchor inflation expectations and help to achieve maximum sustainable employment.

The board stated that inflation pressures are set to increase in the near term, amid rising capacity pressures, higher oil prices and transport costs, and supply shortfalls. Near-term consumer price inflation is expected to rise above the committee’s target before returning to the 2% midpoint in mid-2022.

“Headline inflation is projected to peak at around 4% in the September 2021 quarter, but some of the factors lifting inflation are assumed to be relatively short-lived. Headline inflation is expected to stay slightly above 2% over most of the remainder of the forecast horizon due to sustained capacity pressures.” The Monetary Policy Statement showed.

Markets are pricing two rate hikes by the year-end followed by additional 2 or 3 rate hikes in 2022.  

UK Inflation eases from 3-year highs

The annual inflation rate in the UK eased to 2.0% in July, from its three-year high of 2.5% reached in June. The reading came well below market expectations of a 2.3% rise. Now inflation rate is back to the Bank of England’s target, reflecting diminishing inflationary pressures. The annual core inflation, which excludes volatile items such as energy and food prices, rose 1.8% in July, compared to June’s 2.3%.

USD Market News
UK Inflation. Source: Office for National Statistics

Aussie down despite better-than-expected labor data

The Australian dollar has been trading lower during the week affected by the rising concerns over a slower economic growth due to impacts of lockdowns and as the number of COVID, cases continue to hit new records locally. The Aussie has lost nearly 2.5% against the greenback as the pair AUD/USD fell below 0.7160, marking its lowest level since November.

Economic data has been encouraging as the unemployment rate fell from 4.9% to 4.6% in July, while the market expected a slight rise to 5.0%. The employment change however eased to 2.2K, compared to 29.1K jobs added back in June. Market consensus was pointing to more than 42K job losses.

The RBA meeting minutes failed to offer any positive support for the currency with growing concerns about covid-19 effects on the economy and policy path. Members stated that the central scenario for the economy is that conditions for raising rates will not be met before 2024.

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