FX market outlook

FX market outlook

Posted on Tuesday, August 29 2017 at 8:35 am GMT+0000

Dollar under pressure after North Korean missile test; euro breaks 1.20

The dollar and risk assets were retreating during Tuesday’s Asian session after a new ballistic missile test by North Korea. The novel feature of the latest missile test by North Korea compared to previous tests was that it flew over the Northern Japanese island of Hokkaido before landing in the Pacific Ocean, which seems to be a first. This caused grave concern in Japan.

Despite the fact that Japan was the country that the missile had overflown, the yen gained against both the dollar as well as the euro, although the euro managed to regain some ground as the session progressed. Dollar/yen was last at 108.83 after having spiked as low as 108.31; a 4 ½ -month low. Euro/yen fell well below the key 130 level to 129.62 before recovering to just below 130.60.

In the session’s key economic releases, household spending numbers out of Japan for July disappointed as they came in well below expectations. Spending year-on-year contracted by 0.2% from a 0.7% expansion forecast by economists. Labor market indicators met expectations with jobs/applications for July coming in at 1.52 and the unemployment rate holding at a low 2.8%. The Bank of Japan’s core year-on-year inflation measure rose to 0.4% from 0.3% the previous month.

In other forex developments, the euro took advantage of the dollar’s weakness to break through the 1.20 level, which was its highest level since December of 2014. The dollar has been plagued not only by doubts whether the Fed will carry through with a third rate hike this year but by worries that the US is also heading towards a government shutdown at the end of September due to disagreements between the President and Congress over fiscal policy. The dollar index also plunged to fresh lows by falling below the 92 level to as low as 91.77; a level also not seen since December of 2014. In German economic news, the GfK German Consumer Climate rose to 10.9 compared to 10.8 the previous month, countering worries that the strong euro was hurting the Eurozone economy.

In the UK, the Nationwide House Price Index showed a drop of 0.1% during August versus analyst expectations of a gain of 0.1%. Euro/pound continued its march higher to make a high of 0.9285.

Gold was another beneficiary of North Korea’s actions and the dollar’s weakness, as it challenged its post-US election high by rising to $1324.52 an ounce. Gold’s attributes as a safe haven and as an anti-dollar asset have made it a favorite with investors lately.

Stocks and other risk assets reacted negatively to the North Korean missile test but investors were cautious of making too much out of this recent development as tensions regarding North Korea in the recent past quickly fizzled out and proved to be a buying opportunity in the end.  Still, geopolitical uncertainty in that area of the world continues to be brewing despite investor complacency.

Looking ahead to the remainder of the day, the main focus will be on the Conference Board measure of Consumer Confidence in the United States as well as a speech by Chicago Fed President Charles Evans a little later on.