Dollar Soars as Markets Brace for Central Bank Frenzy

The dollar hit a new high this week, surging in early European trading as investors prepare for a flurry of central bank meetings. The dollar index, measuring the greenback's performance against top world currencies, rose to 102.06, reaching a peak of 102.19. The positive market sentiment earlier in the year had weighed down the dollar, boosting higher-yielding assets as investors bet on interest rate cuts later this year. But weak European data, particularly German retail sales, which fell -5.3% and contributed to the country’s GDP decrease of 0.2% in Q4 2022, have cast doubts on a soft landing and an early policy turn. Meanwhile, the Eurozone's CPI data for December is set to be released Wednesday, though its impact may be limited as Germany's figures have been delayed due to technical issues.

Investors are cautious and refraining from making new bets on the gold price ahead of the two-day monetary policy meeting of the US Federal Reserve (Fed) starting on Tuesday. While the Fed is widely expected to increase rates by 25 basis points (bps) at the February meeting, experts now anticipate a less dovish approach than previously believed, considering the above-expected US Gross Domestic Product (GDP). If the US central bank provides any indication of a potential pause in its tightening cycle, it could provide support to the non-interest-bearing gold price. However, Federal Reserve Chairman Jerome Powell’s words will be crucial in determining the next direction of the gold price.

Traders will be closely monitoring the Federal Reserve’s Status Cost Index (Q4) and Conference Board Consumer Confidence data for insight into the state of the US economy. The US Employment Cost Index is projected to ease to 1.1% in Q4 2022 compared to 1.2% in Q3 2022.

Risk aversion returned to the market on Tuesday, following the decrease in US S&P 500 futures, as investors consider the latest global economic outlook from the International Monetary Fund (IMF) and China’s Manufacturing and Services PMI data from the National Bureau of Statistics (NBS). China’s NBS Manufacturing PMI rose to 50.1, surpassing the expected 49.7 and the prior reading of 47.0. The Non-Manufacturing PMI also exceeded expectations, coming in at 54.4 compared to 51.0 expected and 41.6 previous.

The euro downtrend remained relatively unchanged on its third day of decline, losing less than 0.1% to $1.0840. The pound drifted lower after the IMF warned that the UK will be the only G7 economy to contract this year. The Bank of England will release lending data at 04:30 ET. The IMF’s winter update was overall optimistic, increasing growth forecasts for the first time in a year due to the reopening of the Chinese economy, which was evident in the official Chinese composite purchasing managers' index hitting a seven-month high of 52.9.

Oil Prices Tumble as Rates hike Loom

Oil prices fell this week as concerns over interest rate hikes and ample Russian crude supplies outweighed hopes for a demand recovery in China. Brent crude futures declined 25 cents to $84.65 a barrel, while WTI crude futures dropped 44 cents, or 0.56%, to $77.46 per barrel. The demand outlook remains murky as Russia's exports show no sign of slowing despite China's economic revival. Investors are bracing for interest rate increases from the US Federal Reserve on Wednesday, followed by a half-point hike by the Bank of England and European Central Bank the next day. These moves could throttle the global economy and dampen oil demand.