FX market outlook

FX market outlook

Posted on Tuesday, November 28 2017 at 9:49 am GMT+0000

US dollar keeps tax-related gains ahead of Powell confirmation hearings

The US dollar was consolidating its gains from the previous day when hopes for tax reform were rekindled by an optimistic tweet by President Trump.

Euro/dollar was pushed back below 1.19 as the single currency showed it was not yet ready for a test of the key psychological 1.20 level. The previous day’s high was 1.1961 – a more than 2-month high – but the euro was last trading at 1.1888. Dollar/yen also reflected some strength by the greenback as it climbed back above 111 to 111.26.

The yen was a little weak despite a mood of apprehension in equity markets, as Chinese equities were at first under pressure but managed to reverse those losses and go slightly positive after posting three consecutive days of losses on Monday and the previous week. There are worries that the regulatory clampdown by authorities of certain types of financial activities in China could lead to tighter conditions in local markets.

President Donald Trump met with Republican Senators on Monday and the mood was one of optimism that tax reform would get a positive vote in the Senate. A vote could take place as soon as Thursday, but there were still Republicans that needed to get on board for a positive vote to happen. Trump tweeted that the tax plan was ‘coming along very well’, which had a positive effect on the dollar. Also dollar-positive were better-than-expected new home sales for October.

Sterling lost ground against the greenback as the previous day’s rally to 1.3377 was met with strong selling that drove the pair back to 1.3324. The pound was doing a little better against the euro as the single currency has failed to punch through the 90 pence level and was last at 0.8922. In today’s news, the Bank of England said all major UK lenders passed the so-called ‘stress tests’ and did not appear to need fresh capital. Stress tests involve checking whether a bank’s capital level is adequate for adverse economic scenarios. This was good news for the pound, as at least one bank – RBS – was suspected to have failed the tests. In addition, the BoE found that UK banks were adequately capitalized to make it through a ‘disorderly’ Brexit if that particular scenario materializes.

Following the release of the Bank of England’s financial stability review and Governor Mark Carney’s press conference, there is little exciting in the European calendar. Market participants might take an interest in Eurozone credit growth followed by the German GfK consumer climate index. Most of the action for today will take place in the United States. In terms of data, the S&P/Case-Shiller house price index will come out, followed by the Conference Board’s consumer confidence index. A number of Fed officials are also speaking today. Jerome Powell will appear in Congress for his confirmation hearing for the post of Federal Reserve President. He is not likely to be seriously challenged as he is not a controversial figure and could attract bipartisan support for his nomination. Other Fed speakers today will be William Dudley and Patrick Harker, while Treasury Secretary Steven Mnuchin is also speaking a little before the close of New York trading. In Canada, Bank of Canada Governor will also make a speech.