FX market outlook

FX market outlook

Posted on Tuesday, March 14 2017 at 9:34 am GMT+0000

Pound tumbles across the board after approval of Brexit bill; dollar strengthens ahead of FOMC.


Currency markets were in a wait-and-see mode during the Asian session as investors were cautious ahead of central bank meetings this week, (which include the Federal Reserve, the Bank of Japan and the Bank of England) and ahead of the Dutch elections on Wednesday. These risk events prevailed over strong Chinese economic data released today.

The FOMC begins its two-day policy meeting today and it is widely expected to increase interest rates by least a quarter of a percentage point. Solid US economic data recently and hawkish rhetoric from Fed policymakers has cemented the case for a rate hike tomorrow. While the rate increase is mostly already priced in by the markets, what is more important is the Fed’s updated economic projections and potential pace of further rate increases later this year.

The dollar has been slowly edging higher against the yen and eventually broke above the key 115-yen level in late Asian trading today.

The Aussie underperformed against the greenback after disappointing Australian business survey results. The NAB business confidence index fell from 10 to 7 in February. Aussie / dollar touched a low of 0.7545 and is down 0.3% on the day.

An overall solid batch of Chinese economic data out today were shrugged off. Data showed that the world’s second largest economy started the year on a firm footing. Chinese industrial production beat forecasts and climbed 6.3% in January to February from the same period a year earlier. Fixed-asset investment rose by a better-than-expected 8.9% year-over-year in the January to February period. Retail sales missed estimates though and rose 9.5%.

The pound fell sharply across the board late in the session as it came under pressure on news that the UK House of Commons late last night passed the bill allowing the government to trigger Article 50. Cable gave up Monday’s gains to tumble to a low of 1.2123. Now that both backed the so-called Brexit bill, Prime Minister Theresa May can proceed with announcing when to begin the formal negotiations for the UK to leave the EU. The Brexit affair has resulted in further complications for the UK as Scotland now demands a new independence referendum.

The euro was weaker against a broadly stronger dollar and slipped to 1.0632. There was little impact from German inflation data this morning. The annual inflation rate hit its highest level in four-and-a-half years after rising to 2.2% in February from 1.9% in January.

Oil prices stabilized after a six-day losing streak. WTI oil traded in a tight range around $48.30 a barrel. Focus will be on OPEC’s latest monthly report due today, which will offer an insight into the pace of production cuts.

Other economic data due today include Eurozone industrial production, German ZEW and US PPI.