FX market outlookPosted on Wednesday, October 11 2017 at 8:51 am GMT+0000
Euro holds strong as Puigdemont delays Catalonia’s independence; dollar heavy amid concerns on tax legislation
The Asian session was relatively quiet on Wednesday as economic releases were limited. Following a stressful day in Spain, where Catalonia’s independence was put on hold, the euro remained strong above the 1.18-key level overnight, while the dollar was under pressure against its peers amid escalating geopolitical risks and fears of tax overhaul failing to turn into law.
While thousands of people and armed police forces were gathered in front of the Catalan parliament ready to counteract a possible “Yes vote” on Catalonia’s separation from Spain, the Catalan leader, Charles Puigdemont, decided to delay a formal declaration of independence and chose instead to initiate a dialogue with the Spanish government, saying that “the only way forward is democracy and peace”. He also suggested that the European Union should be involved in the talks. Still, Puigdemont and other regional leaders signed a divorce from Spain but it is unknown whether the document has a legal value.
The euro picked up after the decision, rising to a two-week high of $1.1833, being 0.18% up on the day. Euro/pound gained 0.23%, climbing to 0.8960, while euro/yen edged up to 132.86.
The dollar index sank to a two-week low of 92.91 before the session-end as two US bombers flew over the Korean peninsula on late Tuesday, joining other South Korean military jets. In addition, the US military announced in a statement that it conducted for the first time an exercise with Japan and South Korea during the night.
Besides geopolitical tensions, traders were also worried about the future of fiscal policy, after officials from Trump’s inner cycle expressed yesterday that Trump’s feud with Senator Bob Corker would harm tax overhaul plans as Republicans control the Senate with a shade of majority. However, on Tuesday, Trump stated that his dispute with Corker would not affect progress on tax legislation.
Dollar/yen was slightly down at 112.37. Dollar/swissie was steady at 0.9751, while the safe-haven gold remained flat at $1,287.60 per ounce.
Later in the day, the focus will turn on the Fed’s September meeting minutes for more details on the path of monetary policy.
In Japan, core machinery orders rose surprisingly by 4.4% y/y in August, after contracting by 7.5% in the previous month, while analysts had projected a soft expansion of 0.8%. This was the highest growth since April.
The pound retreated by 0.13% to $1.3184 as investors doubted whether a rate hike is appropriate given uncertain Brexit negotiations which so far led nowhere.
In other currencies, the aussie reversed earlier gains in the session arising from better-than-expected figures on consumer confidence, standing flat at $0.7778. Particularly, consumer sentiment measured by the Westpac Banking Corporation increased by 1.1 percentage points to 3.6% in October. Its New Zealand cousin weakened moderately to $0.7065 amid political uncertainty in the country.
Dollar/loonie was moving sideways around 1.2521.
Regarding energy markets, oil prices held onto gains after a strong rally on Tuesday. WTI crude was 0.24% up at $51.03 per barrel and Brent picked up by 0.04% on the day to $56.63.