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Improving risk appetite keeps dollar on the defensive

XM.COM

Furious recovery in equity markets continues

Dollar retreats, sterling shines ahead of BoE

Oil awaits OPEC, more earnings and data eyed

Optimism returns

Equity markets seem to have shaken off the blues that dominated trading in January. With the resilience in corporate earnings confirming the real economy is still in good shape, investors are coming around to the view that markets can live with higher interest rates even if that means more frequent bouts of volatility.

Wall Street advanced for a third straight session on Tuesday as some traders covered their short bets and others took advantage of the correction in valuation multiples. Fed officials also downplayed the prospect of shock-and-awe rate increases, stressing that they want to avoid disrupting markets and the economy.

The earnings season has brightened up the mood as well. Google-parent Alphabet and chipmaker AMD both smashed analyst estimates and saw their shares jump roughly 10% in after-hours trading. However, Paypal shares tanked by almost 17% after the bell on weak results, highlighting that investors have zero tolerance for disappointment in an environment of higher rates.

Dollar retreats, pound advances

The improving risk tone spilled over into the currency space too, keeping the US dollar under pressure and lifting all other FX boats. The pound and to a lesser extent the euro have been the main beneficiaries of the greenback’s troubles as traders position for the Bank of England and the European Central Bank policy decisions tomorrow.

With markets already pricing in a quarter-point rate increase by the BoE and another four hikes this year, the most crucial variable for sterling will be the guidance about the rest of the year and when balance sheet reduction will begin. As for the euro, although the labor market is improving and inflationary pressures keep intensifying, it remains to be seen whether the ECB will be comfortable with market pricing for a rate increase by December.

Elsewhere, the aussie and the kiwi have been trading almost entirely as a function of risk appetite, disregarding developments in their economies. The aussie keeps ignoring warnings by the RBA that there is no rush to raise rates, whereas the kiwi is underperforming today even after New Zealand’s unemployment rate fell to the lowest level on record.

Oil grinds higher ahead of OPEC

All eyes will be on OPEC today, which is widely expected to stick to its plan of raising production in a gradual manner. Oil prices have been grinding higher for weeks now as the Omicron wave didn’t hit the global economy quite as hard as feared and the risk of an invasion of Ukraine overshadowed the brighter tone in the nuclear negotiations between America and Iran.

OPEC is unlikely to rock this boat today. Recent reports suggest the cartel and its allies are not seriously discussing the prospect of faster production increases, so oil prices will likely remain in the hands of geopolitics and demand conditions. At this stage, the worst-case scenario for crude would be a simultaneous de-escalation in Ukraine and a deal with Iran being hammered out.

On the data front, the highlight will be the private ADP jobs report from the US, which has not been a great indicator of nonfarm payrolls lately but will nevertheless give markets a taste of what to expect on Friday. So far the tea leaves point to a disappointing and perhaps even negative nonfarm payrolls print as the data was collected during the height of the Omicron wave, which may have artificially skewed the numbers lower.

In earnings, the show will continue today with Facebook-parent Meta Platforms, Qualcomm, and Spotify.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-improving-risk-appetite-keeps-dollar-on-the-defensive-154344
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