Dollar strength dominant, EM and Gold hurt by rate-hike talk

King Dollar was the main talking point across financial markets this week after sharply appreciating to its strongest levels in five months. The combination of rising U.S Treasury yields and positive domestic economic data ensured Dollar strength remained a dominant market theme. With heightened rate hike expectations fueling the upside, emerging market currencies and Gold both felt the heat.

Speaking of Gold, prices finally conquered the psychological $1300 support level. The zero-yielding metal could be exposed to further pain if expectations continue to intensify over the Fed possibly raising rates four times this year.

In the United Kingdom, Sterling was mostly depressed following the disappointing UK jobs report which clouded prospects of higher UK interest rates. With the Pound highly sensitive to monetary policy speculation, fading expectations of a rate hike occurring anytime soon are heavily on the currency.

Interestingly, Crude oil prices were incredibly bullish this week despite the Dollar’s aggressive appreciation. While optimism over rising global demand may have supported oil, price action suggests that the rally remains driven by geopolitical risk factors. The looming Iran sanctions are likely to fuel speculation of tighter global supply, while heightened geopolitical tensions in the Middle East may spark fears of potential supply disruptions. Although oil could edge higher in the near term, robust production from US Shale has the potential to create some headwinds for bulls down the road.

The major risk event this week was high-level trade talks between the United States and China. China has reportedly proposed to purchase $200 billion of American goods which could be seen as an encouraging step towards avoiding a trade war.

The upcoming trading week will be jam-packed with major economic reports from the United Kingdom, Europe and United States. Much attention will be directed towards the UK inflation hearing and CPI figures, as well as the GDP report, which could impact BoE rate hike expectations.

likely to weigh

Market players will closely scrutinise the FOMC meeting minutes for further clues on (US) rate hikes this year. With the Dollar strength being a major market theme, emerging market currencies may remain vulnerable to further losses.