US Interest Rates and China's Economic Recovery: Implications for Oil and Currency Markets

On Friday, most Asian currencies depreciated against the dollar, which reached a six-week high against a basket of currencies, boosted by robust inflation readings and hawkish comments from Federal Reserve officials. The latest reading was consistent with an earlier report indicating that the consumer price index was higher than anticipated, which could give the Federal Reserve more reasons to increase interest rates. During separate speeches, Fed officials James Bullard and Loretta Mester expressed a hawkish outlook, warning that if inflation persists, the central bank may raise interest rates at a more rapid pace.

Federal Reserve's Hawkish Comments Drive US Dollar to Six-Week High

Rising interest rates in the US do not bode well for Asian currencies because the gap between risky and low-risk debt contracts narrows, which means that US monetary policy is more restrictive. Moreover, it opens the door to the possibility of a US recession this year, which could significantly impact sentiment towards risk-driven assets.

China's Economic Recovery May Benefit Other Asian Currencies

The Chinese yuan decreased by 0.2%, despite the government's announcement that they have achieved a "decisive victory" over COVID-19, allowing them to relax most restrictions earlier this year. The focus is mostly on China's economic recovery, which could benefit other Asian currencies. This week, China announced additional spending measures aimed at bolstering economic growth following three years of COVID-19 lockdowns. However, economic data from China has been somewhat unconvincing, even after the country relaxed most anti-COVID-19 measures.

US Monetary Policy and Oil Market Volatility

The world's largest oil importer, China, has oil bulls waiting for more consistent signs of economic recovery. The strength of the dollar makes crude oil more expensive for international buyers, which dampens global oil demand. Oil prices were affected earlier this week by the Biden Administration's plan to sell 26 million barrels of crude from the Strategic Petroleum Reserve. In addition, data indicating a significantly larger-than-expected increase in US crude inventories hinted at a potential US supply glut in the short term.

Despite the optimism about a recovery in Chinese demand, the negative supply and monetary policy signals largely offset it, causing oil markets to see volatile swings in recent sessions. This week, both the Organization of the Petroleum Exporting Countries and the International Energy Agency increased their demand forecasts for the year, with China's recovery set to account for over 50% of oil demand.

EUR/GBP Cross Continues Uptrend Despite Positive UK Retail Sales Data

The EUR/GBP cross has been on an uptrend lately, marking the third consecutive day of gains on Friday. After a good rebound from the 0.8800 mark earlier this week, spot prices are holding firm above the 0.8900 round figure in the early European session. Despite this, the latest UK macro data had little impact on the cross as it remained unaffected by the news.

According to the Office for National Statistics, domestic Retail Sales showed a growth of 0.5% in January, surpassing market expectations of a 0.3% decline. Further, sales excluding fuel also beat estimates and rose by 0.4% during the reported month. These better-than-expected figures were a positive surprise; however, the momentum was not sustainable, given the downward revision of the previous month's already weaker readings. This news failed to provide any meaningful impetus to the British Pound, nor did it affect the EUR/GBP cross.