FX market outlook

FX market outlook

Sterling hits new 3-week high; dollar drops below 103 yen on US election jitters.

After a two-day meeting, the Federal Reserve announced on Wednesday that it held interest rates steady again. No rate hike by the Fed was widely expected by the markets because of the growing uncertainty around the upcoming US election.

The Fed released a statement that acknowledged the case for a rate hike is getting stronger and left the door open for a move in December. They indicated that they would prefer to wait for further evidence of progress in the US economy.

The currency markets’ reaction to the Fed decision was muted. The dollar was steady above the 103-yen level after the announcement but then in mid-Asian session trading today the greenback was unable to hold up and fell below this key psychological level to touch a low of 102.54 yen.

The move of the dollar/yen pair sums up the risk-averse mood in the markets as focus shifts back from the FOMC meeting to US politics.  As Hillary Clinton’s lead has been fading this week, investors have been growing increasingly nervous due to the uncertainty that would follow from a Trump presidency if he should win on November 8.

The dent in risk appetite was evident as investors have been piling into safe haven assets and the VIX volatility index jumped while equity markets tumbled. Gold was a major beneficiary of the risk-off environment this week. The metal rose above the key $1300 level yesterday but has retraced some gains today to trade down to $1300.55 in the Asian session.

The euro inched up to $1.1125, extending yesterday’s rally to reach its highest peak since October 11.

The Australian dollar did not change much since yesterday against its US counterpart. It traded between $0.7636 and $0.7682. The aussie received little boost after a narrower-than-expected trade gap. Australia’s September trade balance came in at a deficit of AUD$1.227 billion, narrower than the deficit of $1.7 billion expected.

Meanwhile data out of China did not have much of an impact on the aussie either. The Caixin services PMI reading for October came in at 52.4, below the 52.5 expected, but above the previous level of 52.0.

Sterling is trading at its highest in three weeks against the dollar at $1.2363 thanks to the broadly weaker dollar on US election worries. Today’s risk for the pound will the Bank of England policy meeting and BoE quarterly inflation report. Also, UK services PMI are due today during the European session. Focus will also be on the EU Membership court ruling. The United Kingdom’s High Court is due to announce a ruling today on whether the UK government can bypass Parliament and initiate the Brexit process by triggering Article 50 of Lisbon Treaty.