FX market outlook

FX market outlook

Posted on Friday, August 11 2017 at 8:25 am GMT+0000

Geopolitical tensions unfold, though rally for safe havens comes to halt

Escalating turmoil between the US and North Korea has continued to dominate the news flow in forex markets as the war of words threatens to spill over into army confrontation. However, the demand rally for the safe haven assets came to a halt ahead of European trading. Oil prices dropped, reversing some late night gains.

Markets in Asia woke up to news that President Trump increased his verbal threat to North Korea by saying that his earlier comment about “fire and fury” was not “tough enough” and how North Korea “better get their act together or they’re going to be in trouble like few nations ever have been in trouble in this world”. This led to gold hitting a fresh nine-week high of $1,288.84 an ounce and pushed the dollar/yen pair down through the 109 level. The demand for the Swiss franc also rose, with the franc strengthening against the dollar and the euro. However, the rally stopped with all the currency pairs being broadly flat and gold modestly declining as European traders were starting the day.

Dollar/yen was last trading at 109.2, gold was at $1,285.75 an ounce, dollar/franc was at 0.9625. The euro has weakened against the dollar to last trade at $1.1755. The pound was modestly up against the greenback, but trading just below the 1.3000 level.

Market participants are eagerly awaiting the inflation figure out of the US later in the session. Economists are forecasting a pickup in the monthly core CPI index with a gain of 0.2% in July, up from 0.1% the prior month. On an annual basis, CPI is expected to mirror the figure of 1.7% recorded in June. Should inflation overshoot expectations, the dollar will strengthen as investors will see rising consumer prices as a sign that an interest rate hike by the Federal Reserve has much higher chances of happening this year. The dollar index was modestly up during Asian trading to last trade at 93.48, linked to the weaker euro.

The Australian dollar has weakened against its US counterpart during the Asian session, though the aussie managed to soften its losses by firming up in late Asian trading. Following the speech by Reserve Bank of Australia Governor Philip Lowe the aussie tumbled to $0.7838, its lowest since mid-July, but managed to recover to 0.7858 ahead of European trading. RBA Governor Lowe opened his speech by saying the bank prefers to be prudent and keep the cash rate at 1.5% as it supports jobs growth and a return to average inflation. However, during the Q&A session the Governor said that market pricing on interest rate moves looks reasonable, also he hinted that the next move could be an increase. This provided support for the aussie.

Oil prices fell during the Asian session despite an updated forecast from OPEC showing that demand could increase by around 200,000 barrels a day for the next two years. WTI was last trading at $48.30 a barrel (down 0.60%) and Brent was at $51.63 (down 0.52%).