FX market outlook

FX market outlook

Posted on Wednesday, October 26 2016 at 7:50 am GMT+0000

US dollar drops after Tuesday’s high; aussie shines on inflation.


The US dollar was under some profit-taking following a fresh 9-month high for the dollar index the previous day.  The Australian dollar was strong on better-than-expected inflation, while sterling bounced back from its lows after Carney’s comments the previous day.

The US dollar was on the defensive during Wednesday’s Asian session after the dollar index hit a high of 99.11 the previous day on expectations that the Fed will hike interest rates before the end of the year.  Some profit-taking on the dollar was normal given its outsized gains recently and worse-than-expected Consumer Confidence for October was also negative for the greenback.  The dollar index was last at 98.57, while the euro also took advantage of the weakness as euro / dollar climbed above 1.09 to reach as high as 1.0908.  Dollar / yen was at 104.17 – off the previous day’s high around 104.87.

Sterling bounced back from heavy selling on Tuesday, after Mark Carney said that the bank would not be able to ignore an inflation overshoot and that the drop in sterling was “fairly substantial”.  Sterling was particularly volatile as pound / dollar fell from 1.2242 to as low as 1.2081 but rebounded to the 1.2190 area following Carney’s remarks.

The Australian dollar was again trying to climb above 0.77 against the US dollar as it reached 0.7708 following strong inflation data.  The aussie was last at 0.7696.  Year-on-year inflation for the third quarter in Australia climbed to 1.3% compared to 1% the second quarter and 1.1% expected.  However, the weighted mean and trimmed mean measures, which exclude some extreme price movements, were more in line with expectations.  Still, the data is seen as slightly reducing the chances of a rate cut in the future.

In European data, German GfK consumer sentiment came in slightly lower-than-expected while import prices for Europe’s largest economy slightly rose in September.

In the commodity space, oil drifted below $50 a barrel to around 49.43 as US stocks rose, Nigerian exports climbed and OPEC members together with Russia appeared to be disagreeing on how the output cut would be distributed.

Looking ahead to the remainder of the day, it is likely to be relatively quiet in terms of major economic releases or central bank speeches.  September New Home sales will be announced in the United States, followed by energy inventory numbers.  US Markit Services PMI will also come out.