Recovery in dollar may strain commodities; central banks in focus next week

After hopes of a pause in interest rate hikes by the US Federal Reserve sparked euphoria last week, global markets turned cautious amid mixed US earnings and data.
The dollar recovered from a 15-month low of 99.57 hit earlier in the week after an unexpected drop in US jobless claims showed signs the labor market remains strong and spurred bets on higher interest rates. On the other hand, housing data proved lackluster with home construction starts, building permits and existing home sales all missing estimates for June.
The greenback also received support from colder-than-expected UK inflation, dovish remarks from the Governor of the Bank of Japan (BOJ) and an official from the European Central Bank (ECB). ECB Governing Council member Klaas Knot said monetary tightening after next week’s meeting is almost guaranteed, heralding the end of an unprecedented rate hike campaign. BOJ Governor Kazuo Ueda said the inflation target is still far from being achieved, which shows support for maintaining extremely accommodative monetary policy for the time being.
Most commodities saw declines from higher highs seen last week on the back of the dollar’s rally. COMEX Gold hit a six-week high of $1989.8/troy ounce on the back of a weakening dollar, falling US Treasury yields and renewed geopolitical tensions between Russia and Ukraine.
Similarly, silver edged higher to $25.48 per troy ounce, supported by the prospect of federal funds rate peaking earlier than expected. But the Dollar’s bounce above the 101 resistance reversed the precious metal’s gains. In terms of price action, silver looks more attractive than gold as represented by the gold-silver ratio at its May 2023 low near 79.40.
The LME base metals have fallen sharply from higher levels at the start of the week following a disappointing recovery in the Chinese economy and signs of further difficulty in the Chinese property market. The weekly drop, however, was capped as China pledged to boost consumption, treating private companies like state firms to bolster business confidence and reports of easing restrictions on home purchases provided some respite.
Crude oil prices are headed for a fourth straight week of gains as signs of tighter supply offset demand concerns. Russian marine crude flows fell to a six-month low in four weeks to July 16, reducing inventories at the Cushing, Oklahoma storage hub to their highest levels since October 2021, coupled with a drop in Saudi production, all of which helped keep WTI prices above $76 a barrel. On a technical level, the NYMEX Crude is trading near downtrend line resistance near $77.50 a barrel. A sustainable close above $77.50/bbl will give the bulls the edge to push prices higher towards the next resistance at $79.50/bbl.

Traders will head into next week with major central bank meetings scheduled. Although the Fed is expected to announce a 25 basis point rate hike, the market can cautiously monitor the leading US GDP and Core PCE data to better gauge the monetary policy outlook and set expectations for the September meeting. Fast manufacturing PMIs for the EU, UK and US will drop the first indicators of factory activity in July.

More importantly, markets are awaiting additional stimulus measures from China’s politburo meeting scheduled for late July, as recent data released has raised concerns that China is missing its 5% growth target for 2023, its lowest level in decades.