FX market outlook

Sterling holds gains at six-month highs; aussie underperforms

Sterling held on to gains made after surging to its highest level in more than six months on Tuesday in reaction to an announcement by UK Prime Minister Theresa May who surprised markets by calling a snap general election in June.

Markets see a sure win for Theresa May and the Conservative party and expect that this would strengthen her position during the Brexit negotiations as well as stabilize domestic politics.

The pound rallied to a high of $1.2904 by late Tuesday before steadying just below $1.2900 in Asia today. The euro fell to its lowest level in four months against sterling to touch 0.8312 yesterday before steadying in a very tight range around 0.8355 in Asia.

The euro was supported by the rally in cable and strengthened against the dollar to stay close to yesterday’s three-week high of $1.0735. But gains are expected to be limited ahead of the French elections this Sunday. This is a key risk event for the euro and uncertainty remains high.

Geopolitical risk remains in the background and the North Korea issue is still dampening investor sentiment. An increased demand for safe-haven US bonds pushed prices higher. Consequently, the yield on the benchmark US 10-year Treasury fell to reach the lowest in five months.  A recent change in US inflation expectations has also impacted the dollar as disappointing US data and doubts about economic growth have reduced bets of faster inflation. The dollar index, which tracks the greenback against a basket of six major currencies, remained below the key 100 level. The greenback wallowed near five-month lows against the yen, and continued to trade below 109 yen in the Asian session.

The aussie was one of the worst performing major currencies despite broad US dollar weakness, to reach a low of $0.7514. The Australian 10-year yield fell to its lowest since November. The sharp rise of the pound against the aussie as well as broadly softer iron ore prices, helped weigh on the Australian currency.

In commodities, gold traded around $1285 an ounce, close to five-month highs reached last week. WTI oil halted a sharp two-day decline to trade at $52.30 a barrel, while Brent crude remained just below the $55 a barrel level.

Looking ahead to the rest of the day, the main economic release will be the final reading for March Eurozone inflation data. Forecasts are for a 1.5 % year-on-year print, the same as the previous estimate. The Fed’s Beige Book will be published later and could give more insight into the US economy.