FX market outlook

FX market outlook

Aussie falls to four-month low; US dollar hits six-week high versus yen; gold tumbles.

The dollar was firmer today and held onto gains after rallying to a six-week high against the yen on a hawkish Federal Reserve yesterday. The FOMC unanimously decided to leave interest rates unchanged but signaled that the recent disappointing US economic data would not derail plans for further rate hikes this year.

The Fed indicated that it saw the slowdown in first quarter growth as transitory. The markets reacted positively to the FOMC statement and are still pricing in a June rate hike. This sent the dollar higher against the yen, to reach 112.88 in early Asian session trading today before consolidating. The lack of a big post-FOMC move in the dollar suggested that the Fed meeting was not the big event of the week but rather Friday’s non-farm payrolls will be of greater importance given it will be looked to for confirmation on whether the recent series of soft US data is continuing.

In terms of economic data out of the Asian session today, China released the Caixin services PMI for April, which came in at 51.5 from 52.2 in March, and showed the slowest expansion in nearly a year.

Australia published trade data, which showed the March trade surplus slowed to A$3.1 billion from A$3.6 billion in February. Staying in Australia, RBA Governor Philip Lowe spoke at the Economic Society business lunch in Brisbane. His comments indicated that the RBA has concerns about high household debt in Australia.

The Australian dollar tumbled to a four-month low against the greenback during Asian trading, to briefly dip below the key $0.7400 level after coming under pressure from a selloff in iron ore, a main Australian export. The soft data out of China and Australia, combined with the RBA governor’s comments, all contributed to pressuring the aussie.

The latest French election polls and last night’s final TV debate with centrist candidate Emmanuel Macron and far-right Marine Le Pen, indicated that Macron was still a favourite to win the second round of the elections this Sunday. The euro was not helped much by this news as the broadly stronger dollar brought it down to $1.0874 in late Asian session trading.

Eurozone final services PMI data will be in focus later today. The UK will also release services PMI for April. From the US, jobless claims data are due later, while the US House is set to vote on a healthcare bill to repeal Obamacare.

In commodities, oil held onto losses after slipping yesterday on a smaller-than-expected US inventory decline, based on the EIA report. WTI crude fell to a five-week low of $47.28 a barrel yesterday and consolidated losses in Asia today.

Gold extended losses in Asian trading to reach $1232.93 an ounce, its weakest since March 21, as the precious metal came under pressure due to a broadly stronger dollar and strengthening expectations of a June Fed rate hike.