Weekly Outlook Ending on 18th February 2016
Dollar continues gains on March hike expectation.
The dollar pushed higher against other major currencies, as optimism over the strength of the U.S. economy and hopes for a March rate hike by the Federal Reserve continued to support demand for the greenback. The greenback remained supported after Fed Chair Janet Yellen told the U.S. Senate Banking Committee on Tuesday that the central bank will likely need to raise interest rates at one of its upcoming meetings. Ms. Yellen said that waiting too long to raise interest rates would be "unwise," given the rise in inflation and economic growth. The dollar was also underpinned by Thursday’s upbeat U.S. jobless claims and building permits data. Despite lower optimism of a March rate hike, the dollar is on course to snap a two-day losing streak, benefiting from a slump in both the euro and sterling. According to some source Fed Rate Monitor Tool less than 15% of traders expect the Fed to raise interest rates at its next meeting in March, compared to a 22% likelihood of a March rate hike a day earlier on Thursday. Research group Markit said on Friday that’s its U.K. construction purchasing managers’ index rose to 49.2 in August from 45.9 the previous month, beating expectations for an increase to 46.1.The data came a day after Markit said its U.K. manufacturing PMI rose to a 10-month high this month, easing concerns over a potential economic slowdown in the U.K. following the June 23 vote to leave the European Union.
Euro post continues 2 week loss against dollar.
EURO fell to close lower for session, amid soft durable goods orders in the U.S. and further indications that the Federal Reserve could increase the pace of its first tightening cycle in nearly a decade. Since surging to five-month highs last week, the euro has fallen more than 1.25% against the dollar. At session-lows, the euro dropped to its lowest level since the Fed rattled currency markets worldwide last week by unexpectedly reducing its interest rate forecast for the next three years. More broadly, the euro is down by roughly 1% over the last six weeks. A host of key policymakers from the Fed have struck a considerably more hawkish tone this week, days after the FOMC expressed concern that it may need to slow its outlook for future tightening against a backdrop of slowing global economic conditions. Earlier on Thursday, Federal Reserve of St. Louis president James Bullard hinted that the U.S. central bank's next rate hike could be looming if the U.S. economy demonstrates continued improvement over the next few weeks. While delivering a speech in New York, Bullard noted that the Fed could raise rates when it meets again in late-April and its next rate hike "may not be far off" if inflation continues to increase and unemployment declines from December levels. Bullard’s comments come in the wake of a wave of hawkish statements by his colleagues at the Federal Open Market Committee (FOMC) earlier this week. On Wednesday, Philadelphia Fed president Patrick Harker also recommended that the FOMC raise rates as early as April, while suggesting as many as three rate hikes by the end of the year. Harker's statements followed comparable hawkish positions from San Francisco Fed president John Williams and Atlanta Fed president Dennis Lockhart at the start of the week. They also contradict comments from Janet Yellen at a press conference last week when the Fed chair noted that the central bank should remain cautious with future rate hikes, amid heightened risks in global financial markets.
Pound drops on U.K. retail sales.
The pound dropped against the U.S. dollar on Friday, as the release of downbeat U.K. retail sales data added to concerns over the strength of the economy, while hopes for a near-term U.S. rate hike continued to support demand for the greenback. GBP/USD hit 1.2403 during European morning trade, the lowest since Wednesday; the pair subsequently consolidated at 1.2421, declining 0.54%.Cable was likely to find support at 1.2379, Wednesday’s low and resistance at 1.2550, the high of February 14.The U.K. Office for National Statistics said retail sales decreased 0.3% in January, compared to expectations for a 0.9% rise. Year-on-year, retail sales increased by 1.5% last month, compared to forecasts for a 3.4% gain. Core retail sales, which exclude automobile sales and fuel, fell 0.2% in January, confounding expectations for an increase of 0.7%.Meanwhile; the greenback remained mildly supported after Federal Reserve Chair Janet Yellen told the U.S. Senate Banking Committee on Tuesday that the central bank will likely need to raise interest rates at one of its upcoming meetings. Ms. Yellen said that waiting too long to raise interest rates would be "unwise," given the rise in inflation and economic growth. The greenback was also underpinned by Thursday’s upbeat U.S. jobless claims and building permits data..
Gold breaks on dollar spikes.
Gold struggled to hold onto gains Friday, despite renewed political uncertainty in Europe and a dip in optimism surrounding a U.S. March rate hike. Gold reached a session high of $1244.95 in European mid-day trade, buoyed by political uncertainty in France, after a report suggested that the two main left-leaning candidates in France’s presidential election, Benoit Hamon and Jean-Luc Melechon are considering the possibility of joining forces. Gold pared gains soon after, as the US Dollar Index Futures snapped a two-day losing streak, hitting a session high 100.90.The yellow-metal had been under pressure throughout the week against the backdrop of a spike in optimism of a March rate hike, after Federal Reserve Chair Janet Yellen struck hawkish tone in a two-day testimony to congress. Ms. Yellen said that it would be “unwise” to keep US interest rates lower for longer and suggested that the US economy was “coming closer to achieving Fed mandates”. However, optimism for a rate hike has since waned – According to source Fed Rate Monitor Tool less than 15% of traders expect the Fed to raise interest rates at its next meeting in March, compared to a 22% likelihood of a March rate hike a day earlier on Thursday. Gold for April delivery on the Comex division of the New York Mercantile Exchange traded down 0.18% or $2.35 at $1238.45 a troy ounce. A firmer U.S. dollar continued to weigh heavily on commodities across the board.
Crude recovered on weekend trading session.
Crude oil prices continued to trade within a narrow range Friday but ultimately settled higher as traders weighed up OPEC’s effort to reduce supply against the rise in crude inventories to record high levels. Crude futures struggled for direction, despite a spike in early morning trade, amid reports suggesting that The Organization of the Petroleum Exporting Countries (OPEC) could extend an output cut, which commence January, beyond the previously agreed six-month period. Crude pared its gains in late afternoon trade, following a spike in the dollar and an increase in U.S. weekly rig counts, after oilfield services firm Baker Hughes reported its weekly count of U.S. oil rigs in operation rose by 6 to a total of 597.The rise in the number of U.S. oil rigs, added to fears that increased drilling activity from U.S. crude producers may severely hamper OPEC’s plan to drain the supply glut in order to support crude prices. On the New York Mercantile Exchange Crude Oil Futures for March delivery settled at $53.40, up 4 cents, while on London's Intercontinental Exchange, Brent gained 8 cents to settle at $55.74 a barrel. Oil’s turbulent end to the week, comes after The Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, released a report on Monday, confirming its members were in high compliance with last year’s agreed production cut. OPEC and other exporters including Russia trimmed output in January by 1.7 million barrels a day – close to the agreed cut of almost 1.8 million barrels per day (bpd).Energy traders shift attention to next week’s agenda, which includes a fresh round of crude inventory updates on Thursday, Feb 23.
Summary of the week:
It was a good week for U.S. equities. Starting with the U.S. stocks; Dow Jones gains 251 points and 1.21%. Nasdaq Composite gain 1.39% and raise 81 point. S&P 500 up by 27 points and gained 1.15% for the week.
Coming to European counterparts, UK’s FTSE 100 gained 33 points and 0.45%. German DAX 30 also gained 55 points and 0.46%. Additionally French CAC 40 gain 18 points and 0.36% on the weekly basis.
In commodities Gold dropped $6.7 and Crude Oil down by by $0.92 and over the week.
Euro lost 2.78% over the week while Yen gain 2.52%. Pound gain 1.71% & Ice dollar index got 1.20% on this week.
Note: Here all the currencies are measured in percentage against the U.S. dollar