FX market outlook

FX market outlook

Dollar broadly stronger on positive Fed rate hike outlook; pound steady after Article 50 trigger.

The dollar index rose on the positive outlook for US interest rates while the euro remained under pressure on ECB-related headlines. Sterling was stable after a big dip earlier in the week ahead of the long-awaited triggering of Article 50 that took place yesterday.

The US currency benefitted from some upbeat rhetoric from Federal Reserve officials who support further rate hikes. While the consensus is for a total of three increases in the interest rate, Boston Fed President Eric Rosengren expressed his view in a speech on Wednesday that he would prefer four hikes. His hawkish talk combined with upbeat US housing data yesterday helped lift the greenback higher. Against the yen, it rose to a one-week high of 111.41 in the Asian session before easing back down. Friday’s PCE report out of the US and upcoming nonfarm payrolls will be in focus. More upbeat reports would boost the dollar.

The euro consolidated against the dollar after it weakened yesterday as markets scaled back expectations that the ECB would be moving away from monetary policy easing. The euro was boosted by a report that the ECB had discussed the possibility of raising interest rates before the end of its quantitative easing program. The single currency had risen to as high as $1.0900 and is now trading below $1.0800. ECB sources said the central bank was misinterpreted at its March 9 meeting and that it was not communicating to the markets that it was exiting its current stimulus program.

Sterling was steady above the key $1.2400 level after dropping from $1.2600 earlier in the week. The long-awaited Article 50 trigger was largely taken in-stride by the markets which had months to prepare for so the lack of volatility yesterday was not a big surprise. The pound’s direction going forward will depend on details of the negotiations between the UK and the EU.

The resurgent greenback pushed the aussie lower to reach the key $0.7650 level after rising to as high as $0.7675 early in the session.

Oil extended its rally, with WTI reaching $49.72 a barrel and Brent crude at $52.54 a barrel after a report yesterday showed US inventories rose less than forecast.

Gold traded around $1250 an ounce, down for a third day due to broad dollar strength.

For the rest of the day, markets will focus on data out of the US which include jobless claims and the final reading of Q1 GDP, as well as Fed member Kaplan’s speech.