FX market outlook

FX market outlook

Sterling on track for weekly gains, euro tumbles, dollar firm on rate hike expectations.

The dollar is set to end the week higher as it was boosted after the US elections this week. Donald Trump’s victory gave markets optimism that his fiscal spending plans will boost the US economy. Increased inflation expectations led to a drop in bond prices, while the Dow Jones Industrial Average surged to a record high. Emerging markets sold off sharply.

Meanwhile growing expectation of a December rate hike by the Fed is helping boost the dollar. On Thursday, St. Louis Fed President James Bullard said that a rate hike in December would be reasonable.

The benchmark 10-year US treasury note yield jumped the most in three years after the Trump victory. This rise in yields has been the biggest boost for the greenback.

The dollar consolidated near a 3-1/2-month high versus the yen after hitting 106.93 yesterday, the highest since July 21. Some profit taking today led the pair to an Asian session low of 106.24 yen.

The euro hovered around the key $1.0900 level in Asia after tumbling 1% against the dollar yesterday and is set to end the week over 2% lower. The single currency is losing demand as focus is shifting to Europe and impending risk events there now that the risk of the US elections is over. There are upcoming political risks toward the end of 2016 (referendum in Italy) and again in 2017 (elections in France).

The sell-off in the euro pushed EURGBP down to 0.8661 yesterday and the pair consolidated these losses in Asia today. The pound was supported by its big gains against the euro and this helped push cable to a high $1.2583 yesterday, the highest since October 7.  Sterling held gains in Asia today.

The Aussie, which is sensitive to risk, oscillated around the key $0.7600 level, on track to end the week with losses against its US counterpart.

Gold remains below $1300 to trade around $1260.

Looking ahead to the rest of the day, the economic calendar is quite light since it is a bank holiday in the US, Canada and France.

Fed vice chairman Stanley Fischer will be speaking in Chile later today. His topic will be on “US Monetary Policy and the Global Economy”. Markets will watch closely to see if he will signal that a December’s rate hike is still on the table.

The University of Michigan Consumer Sentiment report will be released out of the US for November. The flash reading is expected to be 87.5, which is slightly higher than the 87.2 October reading.