Dollar eases as stocks push higher
Fawad Razaqzada February 9, 2023 12:31 PM
Sentiment improved after a lacklustre session on Wall Street the day before, when equity indices closed lower.
The US dollar fell, allowing the likes of GBP/USD, EUR/USD et. al., to recover in the first half of Thursday’s session. There was no obvious trigger for the dollar selling, but FX traders got their direction from equity markets where risk sentiment improved after a lacklustre session on Wall Street the day before, when equity indices closed lower. US futures bounced back along with the European markets, where the UK’s FTSE 100 again hit a new record high, and the German DAX jumped more than 1% to track a positive session in China. What’s driving the optimism and will the positivity last?
What’s driving the optimism?
It appears as though investors are cheering any piece of good news that come their way. Today, sentiment was boosted after latest German inflation data showed an unexpected cooling to 9.2%, down from 9.6% and well below forecasts of a return to double-digit inflation of 10%. On top of this, company earnings from the likes of Siemens and AstraZeneca were well received. In addition, the lack of any further negative news encouraged the bears to cover some of their short bets, alleviating pressure from indices and beaten down currency pairs.
What about rising US interest rates expectations?
Investors have now had several days to digest that surprisingly strong US employment report and what it meant for monetary policy. Initially, the markets responded in the way you would expect: the dollar jumped, and gold slumped, while equity markets turned choppy, as investors priced in more rate hikes than had been expected. Some hawkish Fed commentary followed, although this was countered by the Fed Chairman Powell who did not appear too alarmed. With equity markets holding their own relatively well, and the dollar resuming lower, it looks like the market has decided the strong jobs data shows the economy is resilient and that inflation may be cooling down anyway as wages grew in line with expectations.
But is this view justified?
Are we going to see renewed strength in the dollar, and will that weigh on risk appetite?
A lot will now depend on incoming data. As we have seen with the release of German CPI data today, the market is very sensitive to inflation data as that’s precisely what central banks are also watching. It is all about front-running central banks.
The reaction to Jay Powell’s speech on Tuesday was a positive one for risk assets, which meant that the dollar would come under pressure given its general negative correlation with stocks. Did the Fed Chair say anything dovish? No. Was he super hawkish? Again, no. He was deemed neutral overall. Powell acknowledged that the disinflationary process is underway, but also suggested that interest rates may have to be pushed even higher if jobs data continues to show upside surprises. So, the dollar may yet make a comeback.
How to trade with City Index
You can trade with City Index by following these four easy steps:
Open an account, or log in if you’re already a customer
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
- Search for the company you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.