Daily FX market outlook

The US dollar held on to the gains of the previous day against the euro and was off its lows versus the Japanese yen, as incoming data was positive for the greenback despite some relatively dovish Fed speakers.

The euro was pinned near the 1.12 mark versus the dollar, due to re-emerging worries about the health of Europe’s banks and political uncertainty in Italy ahead of a key referendum in December.  Deutsche Bank’s shares fell to a new record low Tuesday on concerns that the US Department of Justice would impose a mammoth 14 billion dollar fine on the struggling lender.

Dollar / yen was for the moment defending the 100 level as an attempt to drive it below yesterday failed.  Japan’s Nikkei stock index fell sharply on concern about the strengthening yen, but the Nikkei’s drop did not result in risk aversion elsewhere.

The aussie was also relatively strong versus the US dollar as it traded around 0.7670.  A key challenge for the Australian dollar was to overcome the 77 cents level, which would open the way to test the high of the year above 78 cents.

In the United States, Fed Vice-Chair Stanley Fischer said he was seeing a tighter labor market, with higher wages as one of its fruits.  However, that comment was balanced by his statement that he didn’t want the Fed to raise rates too much.  San Francisco Fed President John Williams was slightly more hawkish when he said in an interview that the US economy could handle a rate hike but also acknowledged there was considerable difference of opinions inside the Fed.

In economic news from Tuesday, the Conference Board’s consumer confidence for September rose to its highest since August 2007, showing that the US consumer was in upbeat spirits.  Markit’s flash Services PMI also managed to beat expectations, somewhat calming concerns that arose from the very weak ISM PMI readings earlier in the month.

The market was also focused on the meeting of OPEC oil producers with Russia in Algiers, although expectations for a deal to freeze output were low.  US light crude futures traded below $45 a barrel at 44.74.

Looking ahead to the remainder of the day, there will be plenty of appearances from central bank officials.  ECB President Mario Draghi will both appear at a research conference as well as speak before the German parliament on “Current developments in the euro area”.  Fed Chair Janet Yellen will also appear before a congressional committee but her main focus will be financial regulation and supervision.  Other Fed officials such as Kashkari, Bullard, Evans and Mester will also make appearances.  In terms of data, durable goods orders out of the United States and EIA energy inventories will also be closely monitored together with any announcements from Algiers.