FX market outlook

FX market outlook

Posted on Thursday, October 12 2017 at 9:18 am GMT+0000

Dollar faces tailwinds after FOMC minutes; euro rises as Rajoy sets deadline for Puigdemont

The dollar was mostly in the red against its major counterparts during the Asian session after the FOMC meeting minutes released on Wednesday indicated that Fed policymakers had doubts on the inflation path. In contrast, the euro was on track to post gains for the fifth straight day as Catalonia’s questioned status of independence is likely to clear out next week.

On late Wednesday, the minutes of the Fed’s September meeting sounded dovish to investors’ ears as the statement showed that policymakers are concerned that factors weighing on inflation might be more persistent and “patience in removing policy accommodation while assessing trends in inflation was warranted”. Even though this might signal a slowdown in interest rate hikes, the minutes also revealed that most policymakers continue to support another rate rise this year.

Later in the day, market watchers will keep a close eye on PPI figures released out of the US for more evidence on inflation (CPI numbers out of the US will be released tomorrow). Initial jobless claims will be also in focus.

The dollar index made a fresh two-week low of 92.79 before it edged up to 92.81, being 0.17% down on the day. Dollar/yen declined by 0.19% to 112.25, finding additional pressure from Japanese election polls published by the Nikkei business daily on Wednesday which showed that Prime Minister Shinzo Abe’s conservative Liberal Democratic Party could keep its two-thirds majority in the elections scheduled for October 22. In terms of data out of Japan, the service sector experienced a contraction of 0.2% m/m in October, whereas analysts expected a growth of 0.1%. Moreover, Japanese PPI rose by 3.0% y/y and 0.2% m/m as expected.

In Spain, the Prime Minister Mariano Rajoy, asked the Catalan leader, Carles Puigdemont, on Wednesday to clarify whether he considers Catalonia as independent, giving a time deadline of eight days for the region to drop its independence bid. Moreover, he said that if the Catalan government shows opposition, then he would have to suspend the region’s autonomy. This comes after Puigdemont signed Catalonia’s sovereignty on Tuesday but froze its implementation to give time for both sides to start discussions on the matter.

Euro/dollar approached a three-week high of 1.1879 but slipped to 1.1860 afterwards following worse than expected CPI readings out of France. The pair was 0.15% down on the day.

Pound/dollar made a fresh one-week high of 1.3264 but fell to 1.3240 before the session-end, gaining 0.14%. Figures on RICS House Price Balance provided some support to cable as 6% of surveyors reported house price increases in their areas in September, while analysts expected the figure to drop from the previous 6% to 4%.

In other currencies, the aussie surged 0.60% reaching a one week high of $0.7834 on the back of a weaker dollar as well as on better than expected new home loans and inflation projections. In August, new home loans increased by 1.0% m/m, above the 0.5% anticipated but below the downwardly revised 2.8% experienced in July. Annual inflation forecasts for the next twelve months published by the Melbourne Institute rose from 3.8% to 4.3%.

The kiwi climbed by 0.50% to a one week high of $0.7187 despite coalition talks in New Zealand being still in the dark as Winston Peters, the leader of the kingmaker First Party said on Wednesday that he needs more time before he gives his final answer on whether he will side with the National Party or the Labour-Green bloc.

Regarding commodities, WTI crude and Brent were weaker ahead of the EIA report later today, with the former being down by 0.49% at $51.05 per barrel and the latter falling by 0.28% to $56.78. Gold was 40% up at $1,296.80 per ounce.