It’s a fresh week in the market. Investors were shocked last week as risk-off returned on the ground of the Fed and its peers playing down on inflation.

The positive impact of the Covid vaccine has led to the re-opening of economies. This, in turn, has produced better than anticipated economic data which are proofs that recoveries are coming along stronger than the pre-2021 forecasts. However, investors are frowning on the inflation neglect by the policymakers. On another ground, faster recovery than expected could mean that the banks would start talking about rate hikes at a sooner time than they have been saying. There was therefore more bid for safe-havens while the equities and high beta FXs plummeted. Let’s look at the last week’s recap.

Last Week Wrap

  • The UK announced a corporate tax rate hike from 19% to 25% in 2023. However, this will only apply to businesses whose profits exceed GBP 50,000. Despite the hike, the UK will still have the lowest tax rate among the G7 economies. The Pound Sterling has been in a strong positive position across the board except against the USD.
  • The Reserve bank of Australia kept the interest rate unchanged at a record low of 0.1%. Also, the bank has decided to refrain from tightening until it’s able to meet its inflation target range of 2-3%. Meanwhile,  the Aussie GDP for the last quarter of 2020 saw an expansion of 3.1%.
  • OPEC+ decided not to trigger additional 500k BPD output as agreed in late 2020. Also, Suadi Arabia said it would continue its voluntary 1 million BDP cut. These two came as positives for the oil market as prices skyrocketed to the highest in over a year. However, Russia has asked for an exclusion from the deal as it plans an additional 130k barrels on its daily output.
  • The US NFP employment change for February jumped to 379k, doubled the market’s consensus figure. Also, the unemployment rate dropped to 6.2%. Despite the positives, the dollar index found resistance at 92 and closed below it by the end of the week.
  • On Saturday, the US Senate approved President Biden’s $1.9 trillion Covid relief package. The deal will be returned to the House for further approvals on Wednesday.
  • Equities struggled last week but made marginal profits- S&P 500 up by a marginal 0.85%, Dow up by 1.3% but the NASDAQ fell by over 3.4%. Meanwhile, European and Asian stocks closed the week on positive despite a negative end to the week. The dollar rose sharply across the major FX board – up by 1.2% last week to touch 92.2 but closed below 92. Oil prices new rally was triggered by OPEC+ policy as WTI reached $66 having gained 7.7% last week. Gold and metals fell. The yellow metal was down by 1.9% last week to complete the third successive weekly losing streak.

The Week Ahead – What to expect

The market will continue to watch the developments around Covid, recovery in terms of economic data releases, central bank’s monetary policies and statements among others. Volatility is expected to be high especially in the FX market with the European Central Bank (ECB) and the Bank of Canada (BoC) due to release their latest monetary policies on Wednesday and Thursday respectively. On the macroeconomic front, the US inflation report and the Canadian employment data will take the central stage on Wednesday and Friday respectively.

Also, The Bank of England Governor’s speech amid the last week’s budget and the current economic recovery would be scrutinized. On Tuesday, RBA Governor would follow suit – perhaps he would give more clues concerning the bank’s bond-purchasing policy.

Market Forecast

We might start seeing some weakness on the dollar this week as risk-on sentiment could resurface. We have seen this mood-swing often times this year in a range-bound manner. If investors get to reason and trust the bank’s stance on the current monetary policy, we might see them drop their hold on safe-havens. Also, the $1.9 trillion package is expected to be finally approved this week. Although the market has already priced in the effect, a return to risk-on is expected to dominate the week.

Equities might therefore press further with their late last week’s recovery thus pressuring the dollar index to shed last week’s profits. If the DXY bears are bold enough to push to 91.5, a decline below 91 is high on the cards. If this happens, we should see the Euro jump above 1.21 again while the Sterling rally above 1.4-1.41 although a retest of 1.378 shouldn’t be ignored. The BoE governor is expected to come with some hawkish tone to support the Sterling. Also, JPY and CHF could be pressured as safe-havens while AUD and NZD could recover some of last week’s losses.

CAD was one of the biggest gainers last week despite risk-off, largely due to the massive oil price gains. Further rally in the oil price is expected to the $70s for WTI which could add to the CAD’s strength. Adding the BoC and Canadian employment data, CAD would be one of the most-watched instruments this week.

Gold and metals are expected to bounce if the dollar retreats as expected. The yellow metal should close the week above the 1700 psychological level as the bears could struggle at the current support level.

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