FX market outlook

FX market outlook

Posted on Wednesday, May 17 2017 at 8:19 am GMT+0000

Dollar extends losses on US political concerns; euro rises to $1.11

The main focus of the markets in Asia today was on US political concerns as President Donald Trump continued to create controversy. Risk aversion led to a stronger safe haven yen while gold also benefitted from a weaker dollar. The euro rose to a fresh six-month high.

A recent batch of soft US economic data has raised doubts about whether the Federal Reserve will raise interest rates at its upcoming meeting in June, as was much hoped for by the markets. Yesterday’s data on the US housing sector also disappointed and followed from last week’s soft data on inflation and retail sales. All this put pressure on the dollar.

Meanwhile, political turmoil surrounding the US President are raising concerns that Trump’s growth agenda and tax reform plans may be stalled. This is also denting appetite for the greenback. A New York Times report said that Trump asked the then FBI Director James Comey to end an investigation on ex-White House national security adviser Michael Flynn, according to a Comey memo. Flynn was being investigated for his ties with Russia before Trump became president and subsequently resigned on these revelations.

The dollar index has fallen for a fifth day, dropping below 98 points in Asia today, reaching a new six-month low. Against the yen, the dollar slid to 112.25 yen, the lowest since May 5.  Gold was supported by a weaker dollar and rose to a high of $1244.82 an ounce.

The euro extended its rally against the dollar to reach a new six-month high of $1.1121. Political risk in Europe has faded after the French elections, while the Eurozone economy has been gaining momentum. In contrast, recently in the US, political risk has increased, alongside the releases of softer US data.

Data out of Europe yesterday gave the euro an added boost. First quarter Eurozone GDP rose as expected by 1.7% year-on-year while the German ZEW index firmed in May.

The euro also gained against the pound, to reach a high of 0.8614 in Asia, while against the Australian dollar, the euro rallied to an eight-month high of $1.4989. The Australian dollar did not benefit from a broadly weaker US dollar and aussie / dollar fell towards the key 0.7400 level by late Asian trading from a high of $0.7442. Risk aversion likely overshadowed the rise in Dalian iron ore prices today (a key Australian export) and also news of the S&P reaffirmation of Australia’s AAA credit rating.

Sterling will be in focus in the upcoming European session as the UK employment report is due. The pound reached a session high of $1.2940. Yesterday’s UK inflation data helped underpin the British currency.

Other data to look forward to later today include Eurozone inflation and the EIA crude oil inventory report. WTI has fallen back below the key $49 a barrel level in Asian trading today following a disappointing API report yesterday, which showed a build in US crude inventories.