FX market outlook

FX market outlook

Posted on Friday, October 6 2017 at 8:52 am GMT+0000

Dollar rallies as US tax reforms head to Senate; pound tumbles to one-month low

A stream of upbeat US economic data, as well as the approval of the 2018 fiscal budget in the US on Thursday, boosted the dollar to a 7-week high on Friday ahead of the widely expected nonfarm payrolls due later today. Meanwhile, the pound stretched its downtrend as concerns over May’s leadership continued to weigh on the currency.

Late on Thursday, the Republican-led US House of Representatives gave the green light to the 2018 fiscal spending to set the stage for a tax overhaul which is expected to pass easily in Senate with a simple majority, as Republicans hold 52 out of 100 seats. Although tax cuts could boost household consumption and corporate investments, Fed officials were reluctant on tax change’s future effects, with the San Francisco Fed President, John Williams, saying that gains from tax cuts could be short-lived, increasing indebtedness and feeding an “unsustainable” growth.

The dollar index flew to a 7-week high of 94.08, finding additional support from better than expected economic evidence. Next on the day, investors will eye nonfarm payrolls, which are expected to slow down given the negative impacts from Hurricanes Harvey and Irma.

Dollar/yen was 0.20% up on the day at 113.01, while labour ministry data out of Japan showed that wage growth turned positive in August.

Against its Canadian counterpart, the dollar stood at a 5-week high of 1.2593, Note that Canadian employment data are due to be released today as well, following worse than expected trade data on Thursday.

The euro extended yesterday’s losses, slipping near to a 7-week low of $1.1685 against the dollar after the ECB meeting minutes revealed that the strength of the currency weighed heavily on the ECB decision to move on with the reduction of the quantitative easing program, a few months before the program expires in December. Moreover, in Catalonia divisions between leaders on the Independence issue were dragging on the markets, while the Spanish Constitutional court said on Thursday that it had suspended Catalonia’s parliament meeting scheduled on Monday.

Sterling lost 0.35% on Friday versus the dollar, falling to a one-month low of $1.3060 as markets were questioning whether the UK Prime Minister, Theresa May, has the ability to govern the country in the face of serious risks because of its decision to leave the EU, following a poor speech at the annual Conservative party on Wednesday. Recall that Brexit talks are due to enter the fifth round on Monday.

In other currencies, the aussie dropped by 0.38% to $0.7764 and the kiwi pulled back by 0.27% to $0.7094.

In energy markets, oil prices retreated on signs that another storm was heading towards the Gulf of Mexico. WTI crude declined by 0.41% to $50.58 per barrel and Brent fell by 0.32% to $56.80.

Gold was trading around $1,268.30 per ounce after approaching a two-month low of $1,266.34 on Thursday.