FX market outlook

FX market outlook

Sterling rebounds on reports that parliament to be consulted on Brexit.

The pound managed to rebound from the 1.20 level following reports that the British Prime Minister would consult parliament on Brexit.  The Australian dollar also performed well after the country’s government successfully sold a long-term bond to investors.

In other currencies, euro / dollar looked set to challenge the 1.10 mark due to recent optimism about the Fed raising rates in December while the ECB is set to continue with its present policy of asset purchases and negative rates.  The pair was last at 1.1047 having put in a low of 1.1031 earlier in the session.

The yen had been boosted by risk aversion following a steep drop on Wall Street overnight, but dollar / yen came off its lows during the Asian session as the selling on Wall Street did not carry over to Asia as strongly.  US stock indices were off by more than a percent duringTuesday’s trading due to worries about corporate earnings.  Dollar / yen was last at 103.63 having traded as low as 103.16 during the previous day’s US session.

In economic news, machinery orders in Japan for August came in much better-than-expected as the month-on-month contraction was 2.2% instead of 5.5% feared by economists.  The year-on-year gain in orders reached 11.6% compared to 6.5% expected.  Although this is a very volatile series, it was an indication that the Japanese economy (especially industry) was doing better in the past few months despite the damage that the stronger yen has inflicted on it.

Sterling managed to stage a strong rebound albeit from fresh 31-year lows as negative sentiment on the pound was also at extreme levels.  According to press reports, the UK’s Prime Minister looked set to give parliament a say in the Brexit process.  Some investors believed that this might have a moderating influence on the ‘hard Brexit’ policy the UK was set to adopt.  The combination of the story and the extreme positioning led to a rebound of pound / dollar from 1.2088 to 1.2324, although the pound backed off to 1.2262 at the time of writing.  Euro / pound also briefly dipped below 0.90 from the previous day’s highs around 0.9130.

The Australian dollar also put in respectable gains versus the US dollar, as the pair rallied to 0.7582 from lows of 0.7531 the previous day.  There were no fundamental news out of Australia other than the very strong investor demand for a new 31-year bond the government issued.  Foreign investors have been keen buyers of Australian bonds due to the extra yield the country provides.

Looking ahead, the highlight of the day will be the Fed meeting minutes, which will be released late in the US session.  The minutes will provide an insight into the split that occurred within the Fed rate-setting committee, with the dissenters in favor of a rate hike reaching the record number of 3 votes in September.  Eurozone industrial production for August and JOLTS job openings for the same month out of the US will also be watched before the release of the Fed minutes.