FX market outlookPosted on Tuesday, October 31 2017 at 9:34 am GMT+0000
US dollar cautious ahead of Fed, FBI probe Russian links weighs; BoJ stands pat
Foreign exchange markets and specifically the US dollar were cautious to break fresh ground during Tuesday’s Asian trading as a combination of bearish and bullish factors left traders waiting for more clues.
The probe of links between the Trump campaign and Russia led to house arrests and criminal indictments the previous day, such as that of Trump’s former campaign manager Paul Manafort. So far the market hasn’t really paid much attention to the news as accusations against Trump’s campaign officials have been around for a long time but this is an issue that could hurt the administration’s agenda if further negative developments materialize.
One development that might have hurt the US dollar further was a report that any cut in the US corporate tax rate would be a gradual affair over time rather than a one-off measure. This would obviously slow down the benefits of the proposed tax reform and this led to modest profit-taking on Wall Street overnight. In US data released during Monday, September personal spending was stronger-than-expected, while inflation as measured by the Personal Consumption Expenditure remained relatively subdued with the core PCE index posting a 1.3% year-on-year increase as expected.
Today also marks the beginning of the Fed’s two-day meeting for deciding interest rates. The Fed is not expected to change rates tomorrow, but a statement pointing to a strong possibility of a December hike is to be expected. This could provide support for the dollar, which was being tested against the yen as dollar/yen managed to break below 113 before rebounding slightly above that level.
The Bank of Japan left its policy unchanged during its latest meeting which ended on Tuesday, which was in line with market expectations. There was still one dissenter in the 8-1 vote who advocated more stimulus.
There was also a minor setback concerning China as the country’s manufacturing PMI dipped to 51.6 in October from the previous month’s 52.4 reading. The reading did hold well above the 50 expansion/contraction limit and services’ PMI, although lower than the previous month, was relatively high at 54.3.
The euro was managing to hold the 1.16 level against the dollar after sharp losses the previous week on indications that Catalonian secessionists would be unable to make progress on their goal. A latest poll showed a pro-unity majority in the region, which meant that the parties backing an independent Catalonia would lose their parliamentary majority if elections were held now.
Later today, GDP releases out of the Eurozone (third quarter, preliminary) and Canada (monthly, August) will attract some attention, while later in the day the Conference Board’s consumer confidence will be released out of the United States. A speech by the Bank of Canada Governor will take place close to the end of New York trading.