Asset Summary – Thursday, 19 February
US DOLLAR is currently experiencing upward pressure fueled by positive economic indicators and indications of a less dovish stance from the Federal Reserve. Recent data showcasing robust industrial production, strong core capital goods orders, and increased housing starts have bolstered the currency’s appeal. Simultaneously, the Federal Reserve’s meeting minutes reveal internal disagreements regarding future interest rate adjustments, hinting at the possibility of maintaining higher rates for longer if inflation persists. Market expectations for rate cuts have been tempered, although reductions are still anticipated, potentially influencing the dollar’s trajectory as investors await key inflation and GDP reports for further clarity.
BRITISH POUND is facing downward pressure as recent data indicates a cooling UK economy. Inflation has slowed, and the labor market shows signs of weakness, with rising unemployment and decelerating wage growth. This has led to increased market expectations of interest rate cuts by the Bank of England, potentially as early as March, which generally weakens the currency. While improved risk sentiment and US Dollar weakness might provide temporary support, the Pound’s trajectory appears tied to further economic data releases and the Bank of England’s response. The possibility of multiple rate cuts this year looms large, suggesting continued vulnerability for the currency.
EURO is facing downward pressure as the US dollar strengthens following hawkish signals from the Federal Reserve. Uncertainty surrounding potential changes in leadership at the European Central Bank and the Bank of France, along with expectations of unchanged interest rates in the Euro area, further contribute to this weakness. Geopolitical tensions are also driving investors toward the safe-haven dollar, adding to the Euro’s challenges. While EU data showed a positive current account balance, it was not enough to offset the broader negative sentiment, and the Euro struggles to maintain levels above 1.1800 against the US dollar.
JAPANESE YEN is currently facing downward pressure as it depreciates against the US dollar. A stronger dollar, fueled by positive US economic data and surprisingly hawkish signals from the Federal Reserve regarding potential interest rate hikes, is contributing to this weakness. Domestically, while Japanese machinery orders showed a strong rebound, concerns about Japan’s fiscal health, spurred by weak GDP growth and warnings from the IMF regarding consumption tax cuts, are further undermining the yen. The market is pricing in a potential rate hike by the BOJ, but this is contrasted by expectations of multiple rate cuts by the Fed, creating a divergence that favors dollar strength. Geopolitical tensions may offer some limited support, but overall, the yen’s trajectory is currently bearish as investors await upcoming inflation data from both Japan and the US.
CANADIAN DOLLAR faces potential headwinds and weakening factors. Recent slowing of domestic inflation, particularly in gasoline and shelter costs, suggests reduced pressure on the Bank of Canada to maintain or increase interest rates, diminishing the currency’s yield appeal relative to other currencies. Simultaneously, anticipated increases in crude oil production by OPEC+ threaten to limit gains in Canada’s key export commodity, further undermining the terms of trade that typically support the currency’s value. Despite the Canadian Dollar showing some resilience, a firm US Dollar adds to the complex dynamics influencing the pair, potentially leading to further fluctuations.
AUSTRALIAN DOLLAR is exhibiting bullish momentum, trading near multi-year highs, buoyed by resilient domestic employment figures that reinforce expectations of further interest rate hikes by the Reserve Bank of Australia. A steady unemployment rate and positive, albeit modest, job creation have led markets to anticipate another rate increase in the near term. This hawkish sentiment surrounding the RBA, which has already raised rates and signaled its intent to combat persistent inflation, is bolstering the currency. Despite a broadly firm US Dollar driven by expectations of sustained high interest rates in the US and geopolitical tensions, the Australian Dollar is outperforming, demonstrating its strength as the second-best performing G-10 currency this year.
DOW JONES is likely to experience downward pressure as futures contracts indicate a decline, influenced by concerns that the Federal Reserve might keep interest rates high for an extended period. This sentiment arises from the latest FOMC minutes suggesting a cautious approach to disinflation, coupled with rising crude oil prices and a resilient labor market. The anticipated increase in interest rates negatively impacts financial institutions, and tech companies are facing scrutiny regarding their capital expenditure plans. Even positive company-specific news, such as Walmart’s earnings beat and dividend increase, failed to provide broad market support, further suggesting a potentially challenging trading day for the Dow.
FTSE 100 experienced a decline, offsetting gains from the previous day’s record high, primarily due to underperformance in the mining and energy sectors. Negative reactions to Rio Tinto’s earnings report and Centrica’s financial outlook significantly pressured the index. While Mondi’s positive movement offered some support, concerns regarding future profits and operational challenges in the paper and pulp market could potentially dampen overall investor sentiment towards the FTSE 100.
DAX experienced a decline, influenced by a combination of factors. Disappointing earnings reports and lowered production targets from major companies like Airbus weighed heavily on the index, highlighting concerns about supply chain issues. Geopolitical instability, particularly US-Iran tensions, introduced an element of risk aversion. Furthermore, uncertainty surrounding future US interest rate policy, indicated by the FOMC minutes, added to the cautious sentiment. However, positive news regarding individual companies, such as Vonovia’s upgrade, offered some support, mitigating the overall downward pressure. The performance of key sectors, like autos, also contributed to the index’s fluctuations.
NIKKEI is exhibiting positive momentum, driven by several factors. The index experienced gains following a tech-led rebound on Wall Street, alleviating concerns about AI-related market volatility. Investors are viewing recent dips in software stocks as chances to buy, anticipating future AI leaders. A weaker yen is further boosting Japanese equities, particularly benefiting export-oriented companies. Strong performance in technology stocks, specifically SoftBank Group, Disco Corp, and Tokyo Electron, alongside financial institutions like Mitsubishi UFJ, Mizuho Financial, and Sumitomo Mitsui, contributed to the overall upward trend.
GOLD’s price is experiencing volatility, hovering around the $5,000 mark. Geopolitical tensions in the Middle East are providing support as investors seek safe-haven assets. However, a strong US dollar, bolstered by recent positive economic data and uncertainty surrounding the Federal Reserve’s interest rate policy, is acting as a counterweight, potentially limiting further gains. The market is closely watching upcoming US economic data, particularly the PCE Price Index, and speeches from FOMC members, as these will significantly influence expectations for future Fed policy and, consequently, the direction of the dollar and gold prices. Conflicting views within the Fed regarding the timing and necessity of rate cuts are creating uncertainty, leading traders to exercise caution.
OIL is currently experiencing upward price pressure, approaching levels not seen since early August. This surge is largely attributed to escalating geopolitical tensions, specifically the potential for military conflict between the US and Iran. The possibility of a prolonged military campaign, coupled with stalled negotiations regarding a nuclear deal, is creating uncertainty and bolstering prices. Adding to this dynamic, recent data indicates a decrease in US crude oil inventories, which, despite following a substantial increase the previous week, is contributing to the overall bullish sentiment in the market.