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US dollar spikes on rate hikes from central banks

 

Friday, December 16, 2022

The news shaping the markets today

Russia’s Foreign Ministry warned that if the US sends Patriot missile systems to Ukraine, it could lead to “unpredictable consequences.” The RUB/USD forex pair traded higher this morning.


Japan’s services PMI rose to 51.7 in December, versus a final reading of 50.3 in the previous month, which lent support to the JPY/USD forex pair.


UK’s GfK consumer confidence indicator increased to -42 in December, sending the GBP/USD pair higher in forex trading this morning.


Australia’s manufacturing PMI fell to 50.4 in December, from 51.3 a month ago. However, the country’s manufacturing sector remained in the expansion zone, which lent support to the AUD/USD forex pair.


New Zealand’s BusinessNZ Performance of Manufacturing Index declined to 47.4 in November, from 49.3 in the earlier month. However, the NZD/USD pair rose in forex trading this morning.

 

What’s happening: The US dollar recorded gains on Thursday following interest rate decisions from global central banks.

What happened: Major central banks raised interest rates in their last policy meeting of 2022.

Traders also assessed various economic reports released during the trading session on Thursday.

Why it matters: The Bank of England announced its ninth rate hike in a row and warned of more increases to ease inflation. The British central bank’s Monetary Policy Committee voted 6-3 in favour of increasing rates by 50 bps to 3.50% at its latest meeting.

The European Central Bank also increased interest rates by 50 bps, delivering its fourth rate hike in a row.

The US dollar, which has lost around 7% in the fourth quarter, moved higher after the Federal Reserve announced a rate hike of 50 bps on Wednesday.

The FOMC members also indicated that interest rates in 2023 could go as high as 5.1%, with cuts in rates seen coming only in 2024. Fed Chairman Jerome Powell also signalled rates staying elevated for some time to control inflation in the country.

The US dollar index, which measures the greenback’s performance versus a basket of major peers, gained around 0.8% to 104.56 on Thursday.

The US dollar briefly pared gains following the data showing the country’s retail sales contracting higher-than-expected in November. Retail sales in the US fell 0.6% in November, worse than market expectations of a 0.1% decline and representing the biggest decline so far this year.

A separate report showed US manufacturing activity in the mid-Atlantic region shrinking for the fourth month in a row in December. However, the number of people filing new claims for jobless benefits fell by 20,000 to 211,000 in the latest week.

The EUR/USD pair jumped to its strongest level since June 9 after ECB Chief Christine Lagarde signalled that the central bank will continue to increase rates by a longer period than was earlier projected. However, the forex pair but moved back to 1.0629 later in the session, down around 0.5% on the day.

The GBP/USD pair also declined by around 2% to 1.218 on Thursday, moving away from the six-month high level of $1.245.

What to watch: Traders await the release of data on manufacturing, services and composite PMIs from the US today. The S&P Global US manufacturing PMI, which was revised higher to 47.7 in November, is expected to improve to 48.2 in December. Analysts expect the services PMI to rise to 47.8 in December, compared to a reading of 46.2 in November.

The markets today

Crude oil will be in focus today after closing lower on Thursday

Context: Crude prices settled Thursday’s session lower as traders assessed conflicting market factors.

Details: WTI crude oil prices fell on Thursday, after jumping around 9% over the previous three sessions after the IEA (International Energy Agency) said oil prices could spike next year as China continues to ease covid-19 restrictions and Western sanctions impact supply from Russia.

On the other hand, the OPEC and Goldman Sachs said energy demand around the world might weaken in 2023.

The Energy Information Administration’s data released on Wednesday showed US crude inventories rising by 10.231 million barrels last week, the largest increase since March 2021 and higher than market estimates of a draw of 3.595 million barrels.

Strength in the US dollar following the Fed’s rate hike also impacted oil prices on Thursday, as a stronger greenback makes oil more expensive for foreign currency holders.

Traders also digested disappointing economic data from China, the world’s second biggest economy. China reported that its retail trade fell by 5.9% year-over-year in November, worse than analyst expectations of a 3.7% decline. Also, China’s industrial production rose by merely 2.2% year-over-year in November, below market expectations of 3.6% growth.

Canada’s TC Energy Corp announced plans to restart operations in a section of the Keystone pipeline, which also exerted pressure on oil prices.

After rising for three straight days, WTI crude oil for January delivery declined $1.17 to settle at $76.11 per barrel on Thursday. Brent crude for February delivery also fell $1.49 to $81.21 per barrel.

In other energy trading, wholesale gasoline for January delivery slipped 7 cents to $2.17 a gallon, while January natural gas added 54 cents to $6.97 per 1,000 cubic feet.

What are expectations: Traders await Baker Hughes data on crude oil rigs today. Crude oil rigs in the US fell to 625 in the week of December 9, compared to 627 in the prior week.

Markets will also continue monitoring the covid-19 situation in China and movements in the US dollar.

Other Markets: European trading indices closed lower on Thursday, with the FTSE 100, DAX 40, CAC 40 and STOXX Europe 600 down by 0.93%, 3.28%, 3.09% and 2.85%, respectively.

Support & resistances for today

Technical Levels News Sentiment
EUR/USD  – 1.0637 and 1.0645 Positive
AUD/USD – 0.6701 and 0.6710 Positive
WTI Crude Oil – 76.04 and 76.36 Positive
Dow Jones  – 33141.64 and 33294.35 Positive
FTSE 100 – 7406.75 and 7445.50 Positive

Market snapshot

Futures at 0400 (GMT)
EUR/USD (1.0640, 0.10%) Dow ($33,467, 0.09%) Brent ($81.48, 0.3%)
GBP/USD (1.2195, 0.15%) S&P500 ($3,931, 0.08%) WTI ($76.32, 0.3%)
USD/JPY (137.66, -0.08%) Nasdaq ($11,473, 0.14%) Gold ($1,791, 0.2%)

What else to watch today

UK’s retail sales, manufacturing PMI, services PMI and composite PMI, France’s manufacturing PMI, services PMI and composite PMI, Germany’s manufacturing PMI, services PMI and composite PMI, Eurozone’s balance of trade, inflation rate, manufacturing PMI, services PMI and composite PMI, Italy’s balance of trade and inflation rate, Central Bank of Russia’s interest rate decision, India’s value of deposits, foreign exchange reserves and value of loans, Canada’s new home prices, wholesale sales and investment in foreign securities, as well as China’s foreign direct investment and Central Economic Work Conference.


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