FX market outlook

FX market outlook

Posted on Thursday, November 2 2017 at 9:29 am GMT+0000

Dollar moderates after reports Powell will be next Fed head; kiwi, aussie keep gains

There was some profit-taking on the US dollar following reports that President Trump has decided to nominate Fed Governor Jerome Powell for the post of new Fed Chair. The kiwi and the aussie were doing well following upbeat trade and housing data out of Australia, while all eyes later today will be on the Bank of England interest rate decision and the reaction of sterling.

Powell was seen as an on-balance dovish choice, but Trump’s choice is understandable given that he might be hesitant to upset markets by introducing fresh uncertainty with an inexperienced appointee. Governor Powell has sided with current chair Janet Yellen throughout most his tenure on monetary policy and he is seen as a steady hand. Reappointing Yellen might have been a good option given her successful track record, but such a decision would have left Trump open to criticism that he was not ‘shaking things up’ as he had promised to do during his campaign. Both Yellen and Powell are perceived as slightly on the dovish side of the scale, but not excessively, so for the Powell Fed, it looks to be pretty much business-as-usual after Yellen steps down in February 2018. Powell is also expected to be approved by the Senate without too many problems.

The policy statement by the Fed during late Wednesday trading did little to boost the dollar as it was in line with expectations. The Fed seemed to set the stage for a December rate hike as it cited “solid” growth of economic activity and continued “strength” in the labor market. There will be an update on the labor market in tomorrow’s release of the October employment report. Euro/dollar rose to around 1.1660 before easing to 1.1635, while dollar/yen once again rose above the 114 mark to 114.08.

In today’s best performing currencies, the aussie reached an 8-day high versus the greenback following positive Australian housing and trade data. Exports grew by 3% in September and the Trade Balance was at 1.74 billion Australian dollars instead of 1.2 billion expected by analysts. Building approvals for the same month grew by 1.5% month-on-month rather than contracting by 1% as economists were forecasting. The aussie reached as high as 0.7725 against the dollar.

The main event of Thursday will be the Bank of England rate-setting meeting, where the Bank is expected to raise rates to 0.5% from their current 0.25% level. Perhaps the outcome of today’s meeting is much less important than the signals that the committee and Mark Carney himself will give in the press conference that will follow the release of the quarterly inflation report. The voting count as well as the minutes and Carney’s guidance will determine whether this is seen as a ‘one-and-done’ type of rate hike (more likely scenario according to the markets) or whether the Bank of England is considering more hikes in coming months. It is said that uncertainty around Brexit could prevent the Bank from hiking further, but doing nothing in the short-term in the face of inflation possibly topping 3% was also inappropriate. So Carney will probably have to perform a balancing act today. The pound fell below the 1.33 level to 1.3261 against the dollar.

Looking ahead, Eurozone final manufacturing PMIs for October and UK construction PMI will be the highlights of the European session. Weekly jobless claims out of the US as well as labor costs and productivity will also be monitored, while speeches by the Fed’s Powell and Dudley could also prove interesting – especially with the appointment of Powell expected to be confirmed by Trump at some point today.