FX market outlook

FX market outlook

Posted on Monday, June 26 2017 at 8:48 am GMT+0000

Euro holds despite Italian banking bailout news; dollar remains weak on hike odds

It was a relatively quiet start to the week for forex markets, as many Asian countries were closed because of the end of Ramadan.

The euro mostly held onto the gains it made before the weekend despite the news that the Italian government was going to rescue two of the country’s regional lenders at the tune of 17 billion euros. Italian banking woes were seen as contained for now, given the positive political developments and the relative strength of the Eurozone economy.

In other news, San Francisco Fed President John Williams reiterated the Fed’s mantra that monetary policy should continue to gradually tighten so as to prevent inflation from rising too fast. Although there have been some soft readings on inflation lately, the Fed’s target of 2% should be met by next year, according to Williams. However, the seemingly hawkish talk failed to provide a boost to the US dollar as market participants remain skeptical about the chances of another Fed rate hike this year. Futures markets are currently putting the odds of such a rate hike at less than 50%.

Euro/dollar was trading around 1.12 during late Asian trading, while dollar/yen was at 111.48. The pound was doing relatively well as it traded around 1.2750 versus the dollar, as the chances of the DUP supporting a Tory government appeared improved during the weekend.

The US dollar could get a lift this week if the US senate manages to pass a Healthcare bill that would revoke the Affordable Care Act, which in turn would facilitate tax cuts by the Trump administration. This could help revitalize the so-called ‘Trump rally’ in the dollar, as the greenback has given back all the gains it made following the election of Donald Trump as President in November of 2016.

In commodities, front-month US oil futures were stronger at $43.60 a barrel, while gold was slightly softer at $1255 an ounce.

Looking ahead, the German Ifo business sentiment survey for June will be released, while later in the day May durable goods orders will come out of the United States. After the European close, a speech by ECB president Mario Draghi will also be closely watched.