FX market outlook

FX market outlook

Posted on Monday, November 27 2017 at 9:55 am GMT+0000

Dollar pressured by risk-off, looming Senate tax vote; Euro and pound hold near multi-week highs

Asian markets had a poor start to the week as sentiment was dampened by sliding stocks in China and South Korea and uncertainty ahead of the Senate vote on the Republican’s tax plan later this week. Investors were also cautious ahead of a busy data week for the major economies. The yen was the biggest beneficiary of today’s risk aversion, rising against most of its major peers, while the US dollar wallowed at two-month lows against a basket of currencies.

Data showing that industrial profits in China were up by 25.1% year-on-year in October, the second highest on record, did little to lift risk appetite, with tumbling Chinese stocks weighing on the markets. With little else on the economic calendar today apart from US new home sales, the focus is on the week’s upcoming inflation data out of Japan, the Eurozone and the US, GDP estimates for the US and Canada, and PMI releases for several countries, including China.

However, investors are likely to be more preoccupied with US politics as the Senate is expected to vote on its version of the tax bill on November 30. With a slim Republican majority of just two in the Senate, the vote can easily fail and cause a widespread market selloff.

The dollar is already under pressure from a weakening inflation outlook in the US, which has cast doubt about how aggressively the Fed will need to raise rates over the next few years. The greenback gave up almost all of Friday’s gains versus the yen today, moving back towards last week’s 2½-month lows. It was last trading around 111.20 yen. It’s broader measure, the dollar index, hit a fresh two-month low of 92.55.

The Congressional hearing on Fed Chair nominee Jerome Powell will be watched on Tuesday for an insight to Powell’s views on monetary policy and on the US inflation picture. Incumbent chair, Janet Yellen, will also be appearing in Congress this week when she gives her semi-annual testimony on monetary policy.

The Australian and New Zealand dollars also struggled, but pares earlier losses to stand flat on the day as the European open approached. The aussie was last trading at $0.7619, while the kiwi stood was at $0.6882.

European currencies fared better with the euro climbing to two-month highs and the pound not too far from Friday’s 1½-month high against the greenback. The euro was boosted last week from strong Eurozone PMI and German Ifo business surveys. Further lifting the single currency in recent days is news that Germany’s SPD party have decided to pursue coalition talks with Angel Merkel’s CDU party, following the collapse of the Jamaica coalition talks, and thus staving off fresh elections in the country. The euro broke above $1.1950 in early European trading today, its highest since September 22.

Sterling meanwhile has been rising on the back of growing hopes that the UK and EU are getting closer to a deal on the Brexit divorce terms after Theresa May raised her offer of the divorce bill. The pound was last trading at $1.3333, just shy of Friday’s peak of $1.3359.

In commodities, gold surged back above $1290 an ounce as investors were drawn to the precious metal’s safe-haven allure. Oil prices slipped back though, with WTI oil futures retreating from Friday’s two-year high of $59 a barrel to fall to $58.33. Crude oil prices will remain in focus this week as OPEC and some non-OPEC countries meet in Vienna on November 30 to discuss extending the output cap deal by a further nine months until the end of 2018.