The market started the new week on risk aversion – exactly where it left it last week. The dollar continues to dominate against its peers while equities look vulnerable. Eurozone PMIs, Kiwi monetary policy statements, US GDP, Inflation reports and the FOMC will ensure another volatile week.
Last Week Recap
The dollar was the strongest safe haven last week. The buck rallied to its 15-month high and thus dominated all the major instruments paired against it. EURUSD dropped to its lowest price since July 2020 after losing over 170 pips last week. The Cable, GBPUSD, was less pressured by the greenback, thanks to BoE’s hawkish monetary policy minutes and better-than-estimate UK inflation reports. GBP was the next biggest gainer after the USD, among the major FX.
Meanwhile, other currencies bowed to the dollar including commodities like Gold and Oil. Gold closed last week less than 1% as it dropped below 1850 while the black Gold shed over 6% and completed its 4th consecutive red week since the over $85 peak (WTI). As for equities, the recent weeks’ rally is slowing down. The S&P 500 hit a fresh high on Friday but quickly dipped. However, the slowdown at the top could force a bearish equities market this week if the risk-off sentiment persists.
The Week Ahead
The Euro was massively hit last week as the economic recovery of the region is feared to be heading toward a rock. Following lockdowns in the Netherlands and Austria, the market fears the zones’ biggest economy – Germany, will be the next hit by the new wave of the virus. Already, Central Bank divergence has weakened the currency against its peers in recent weeks, the persistent impact of the virus will weaken the single currency further. The market expects lower PMI figures on Tuesday. Worse than estimate releases will drag the Euro further downside.
Volatility in the US Markets
Higher volatility is expected this week, especially in the US market with attention on three big events in the country – FOMC minutes, Core PCE and prelim quarterly GDP which are expected to come on Wednesday. The US is probably the best recovered so far among the major economies. Employment figures are shooting high, massive demand is heating up inflation, increasing wage growth and a stock market that continues to break highs very easily. In the last FOMC, the Fed has agreed to start tapering this month to the sum of $15 billion/month with hopes that all of the monetary stimuli will be cleared by the second quarter of 2022. The Fed is expected to maintain the stance of the last meeting. Therefore, the inflation report and GDP data might be of a higher influence.
RBNZ Monetary Statement and Rate Decision
Earlier on Wednesday, the NZD cash rate and monetary policy statement will dominate the headlines. The market largely expects a rate hike from a very hawkish RBNZ. The bank will be the first among the major central banks to work out a back-to-back rate hike since Covid. The market is expecting a 25 basis point rate hike to 0.75%. Rate hike seems to have been priced in already unless the RBNZ surprises with a ‘double’ rate hike up to 1%. The NZD will be massively bided. On the other hand, considering the current lockdown in China amid rising Covid concern, the RBNZ might shock the market by keeping rates unchanged. A fast dip in the NZD could follow such decision.
Other Macro Events
On Thursday, BoE Gov Bailey’s speech might attract fresh volatility to the GBP. On Friday, US treasury current report will complete the week for the dollar.