Daily FX market outlook

Daily FX market outlook

Posted on Wednesday, October 5 2016 at 8:23 am GMT+0000

Euro jumps on ECB taper story; pound, gold struggle to find support

The euro made a comeback against a resurgent US dollar following a story from Bloomberg that the European Central Bank was considering gradually reducing its bond purchases before the program ends.  The British pound and gold on the other hand were struggling to find support as they plunged to fresh lows.

The US dollar was doing well generally – with the possible exception of the euro – after Richmond Fed President Jeffrey Lacker sounded a hawkish note.  Lacker said there was a strong case for raising interest rates and that had he been a voting member, he would also have voted in favor of a rate increase.  Dollar strength was most evident against the yen, as the pair climbed to almost 103 (102.94).  Gold also plunged to as low as $1266 an ounce.  Gold dropped to its lowest since before the day following the Brexit vote (June 24).  The combination of dollar strength, reports of the ECB reducing the pace of bond purchases and the fact that stocks were holding on reasonably well, dealt a significant blow to the precious metal.

Elsewhere, the pound continued to weaken versus the dollar and the euro as it broke below 1.27 to 1.2695 against the dollar and euro / pound climbed to 0.8838.  Only against the yen was the pound still clinging to the psychologically important 130 level at 130.56.  Fears about a ‘hard Brexit’ and the negative economic consequences from such a move have spooked currency markets although UK stocks jumped to fresh records the previous day.

The euro jumped to as high as 1.1238 versus the dollar from around 1.1150 following a report that the ECB was considering reducing the pace of its bond purchases.  There was then a tweet by an ECB media officer that denied there had been such a discussion during the bank’s meeting, but the euro managed to stay above the 1.12 level.  Fears that central banks could start rolling back some of their stimulus hurt risk sentiment around the world and raised bond yields.

In economic data, Australian retail sales for August beat expectations by rising 0.4% month-on-month instead of 0.2% that had been forecast.  The Australian dollar on the other hand was struggling to remain above the 0.76 level at 0.7603.

Looking ahead, some interesting data will be released today.  Final Eurozone Composite PMI will be followed by UK services PMI, while shortly afterwards Eurozone retail sales for August will be announced.  During the US session, ADP employment numbers, international trade balance and factory orders will be closely watched by US dollar traders.