Bets that US inflation may ease in December and repeated push by Chinese authorities for fresh stimulus measures, led to improved risk sentiments this week.
Dollar index witnessed a freefall this week and slipped below 102 for the first time since June 2022 after US CPI came in line with market expectations, indicating Fed’s rate hikes are having the intended effect. US CPI slowed to 6.5 percent Yoy in December, smallest rise since October 2021 and following a 7.1 percent advance in November, primarily pushed lower by sharp decline in gasoline prices, which offset surge in rent.
The greenback has seen declines in 4 out of 5 sessions this week and a temporary gain was seen after some Federal Reserve officials namely Raphael Bostic, president of the Atlanta Fed, and San Francisco counterpart Mary Daly signaled the central bank will likely need to raise interest rates above 5 percent. Also, Fed chair Jerome Powell said restoring price stability when inflation is high can require measures that are politically unpopular, without giving any direct clues on the monetary policy outlook.
COMEX Gold hit eight-month high and breached the $1900 per troy ounce mark buoyed by pullback in dollar and US treasury yields. US 10-year treasury slipped to one-month low of 3.4 percent as easing CPI indicated that the Federal Reserve has some room to slow the pace of interest rate hikes going forward.
Both Brent and WTI Crude Oil closed the week with gains of over 7 percent, boosted by Chinese demand optimism as China reopened its borders to international visitors for the first time since it imposed travel restrictions in March 2020, marking an end to its strict COVID Zero policy just two weeks before the Lunar New Year holiday. Also, fears of supply tightness ahead of EU ban on refined products on February 5 coupled with higher Chinese import quotas for 2023 provided a much needed boost after sharp decline last week.
LME Base metals mostly traded higher with Copper, Aluminium and Zinc, all hitting their highest levels since June buoyed by positive Chinese demand outlook as officials repeatedly pushed for fresh stimulus for the cash strapped real estate sector. Copper jumped nearly 7 percent while Zinc gained 9 percent and Aluminium topped the gains with 11 percent as People's Bank of China and China Banking and Insurance Regulatory Commission, jointly urged the nation's banks to improve "operational and financing cash flows" to the property sector and strengthen financial support to the real economy.
Next week, risk sentiments are likely to be stable on higher bets of slower pace of rate hikes as accelerated cooling in US inflation in the last few months, signaled inflation peaked several months ago and price pressures may ease further in the coming months. Widely watched CME Fedwatch tool now assigns a more than 90 percent and 70 percent probability of a 25 bps rate hike in FOMC February and March meeting respectively.
Further, dollar may witness more downside as Bank of Japan is likely to review its ultra-loose monetary policy in the upcoming meet. Having said that, volatility in commodities may still persist amid release of most important economic indicators from China coupled with PPI and housing market data from the US.
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