Commodities set to end the week on a high as the dollar stumbles

Commodities have had a volatile week in the absence of Chinese participants but weakness in the dollar and some recovery in equities have supported prices.

Gold bounced back from recent lows and has held in a range near $1,800 a troy ounce. NYMEX crude set fresh highs amid tightness concerns, industrial metals have been mixed but copper has managed to inch up to $10,000 a tonne.

The US dollar index hit a July 2020 high in late January as the Federal Reserve signalled early and aggressive rate hikes, given strong growth and rising price pressure. The dollar, however, lost momentum this week, as the market focus shifted to other central banks.

The Bank of England (BoE) raised the interest rate from 0.25 percent to 0.5 percent in line with market expectations. This is the second consecutive rate hike and some central bank officials even supported a bigger hike.

The move shows that the central bank is willing to act to get inflation under control.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Also Read: Dollar restrained by risk revival, spread of rate speculation

The European Central Bank (ECB)  kept monetary policy unchanged, as was expected. However, comments from ECB president Christine Lagarde boosted expectations that the central bank may start tightening soon.

Lagarde acknowledged increasing price risks and did not deny the possibility of a rate hike this year when asked about it.

BOE and ECB's hawkish stance led to a sharp rise in European bond yields.

The UK 10-year bond yield tested December 2018 highs, while German 10-year bond yield jumped to March 2019 highs.

US bond yields, too, edged up but held below the recent two-year high. The sharp rise in European yields pressured the dollar index, lending support to commodities at large.

The dollar was also affected by a dismal jobs report. The US ADP jobs report noted a 3,01,000 decline in private-sector jobs in January against a forecast of 2,07,000 additions. Jobs fell as omicron spread impacted economic activity.

Further clarity on the US labour market may come from US non-farm payrolls data due later on February 4, which may set the trend for the currency in the near term.

While the dollar reversed the gains, the US equity market saw a sharp rebound after recent losses. US DJIA index slumped to April lows in January but recovered more than 7 percent from the lows before slipping back again.

Equities gained some footing as comments from the Fed officials fuelled hopes that the central bank may take a measured approach on monetary tightening to avoid any significant impact on economic activity.

Equities, however, lost momentum again amid some dismal economic numbers and corporate earnings.

With the central bank still the key factor affecting currency movement as well as risk sentiment, market focus may continue to be on comments from central bank officials for clarity on future moves.

US CPI data will further reflect on the inflation situation, thereby the Fed's monetary tightening debate. We may also see some volatility as Chinese markets reopen after a week-long holiday.

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