FX market outlook

FX market outlook

Posted on Wednesday, January 31 2018 at 9:35 am GMT+0000

Dollar on the defensive ahead of FOMC; eurozone inflation on the horizon

Here are the latest developments in global markets:

  • FOREX: The dollar index continued to retreat on Wednesday, trading 0.2% lower ahead of the FOMC policy decision later in the day.
  • STOCKS: Japanese markets were on the defensive, with the Nikkei 225 and the Topix indices falling 0.8% and 1.2% respectively, as the recent surge in bond yields continued to undermine investors’ sentiment towards equities. This was also evident by the underperformance of US indices yesterday, with the S&P 500, Dow Jones and Nasdaq Composite all closing notably lower. The Dow fell 1.4%, the most out of the three, while the S&P followed closely, declining by 1.1%. That said, futures tracking the Dow, S&P and Nasdaq 100 are all currently in positive territory, suggesting these indices could open higher today.
  • COMMODITIES: Oil prices declined during the Asian session Wednesday, with WTI and Brent crude falling by 0.6% and 0.4% respectively, extending the notable losses they posted yesterday. The latest leg down came after the private API inventory data showed an increase in US inventories. Coming on top of the Baker Hughes oil rig data showing a sharp increase in active US oil rigs last week, the API prints probably helped to dent further the optimism surrounding the energy market. Today, investors will pay close attention to the official EIA US inventory data. In precious metals, dollar-denominated gold rose nearly 0.4%, last trading near $1343 per ounce, with the move likely being driven by the tumble in the greenback.

Major movers: Dollar awaits for FOMC; aussie recovers after disappointing data

The US dollar remained largely unfazed by President Trump’s State of the Union address overnight, despite the President calling for a massive infrastructure spending plan that would cost at least $1.5 trillion. Despite this speech proving to be a non-event, the greenback is likely to remain at the center of attention, with the FOMC decision later today likely to determine the currency’s short-term bias.

The Committee is almost certain to keep its policy unchanged, and since this is one of the “smaller” meetings that do not include updated forecasts or a press conference, the price action will be driven by any changes in the phrasing of the accompanying statement. Market chatter suggests there is a likelihood for a more optimistic message from policymakers, amid an improving economic backdrop. Should this be a case indeed, the greenback could recover some of its latest losses on the decision. That said, considering that heightened pessimism currently surrounding the dollar, and the fact that a March rate hike by the Fed is fully priced in, any positive reaction could remain relatively short-lived.

Elsewhere, the aussie tumbled briefly during the Asian trading session, after Australia’s inflation prints for the fourth quarter disappointed. Both the headline and the trimmed mean CPI rates rose, but by less than anticipated, likely denting expectations for a more optimistic tone by the RBA when it meets again next week. Nonetheless, aussie/dollar managed to recover almost all of its CPI-related losses in the following hours.

As for the rest of the commodity-linked currencies, both the kiwi and the loonie surged, with kiwi/dollar gaining 0.7% and dollar/loonie falling almost 0.4%. This may have been a result of the absence of any major statements on trade in President Trump’s address overnight. The President may have been expected to discuss his “America first” policy and perhaps signal more protectionist measures to come. Since he did not, investors may have taken the opportunity to re-enter long NZD, AUD, and CAD positions, as all of these export-driven economies are very sensitive to the global trade outlook.

Day ahead: Eurozone inflation, Fed meeting and Canadian GDP due

January flash inflation figures out of the eurozone will be dominating attention during morning European trading hours. On an annual basis, both headline and core (that excludes volatile food and energy items) inflation are expected to slightly ease relative to December’s respective numbers, remaining well below the ECB’s target for inflation of below but close to 2%. The numbers will go public at 1000 GMT, at the same time that the eurozone’s unemployment rate for the month of December will be released. The unemployment rate is anticipated to remain at the nine-year low of 8.7%. One hour earlier (at 0900 GMT), Germany, the euro area’s largest economy, will see the release of unemployment data for the month of January.

Over in the US, the Fed meeting – the last presided by chair Yellen – will be the highlight of the day and the one having the greatest potential to lead to positioning on the dollar. No change in rates is expected, though a “hawkish hold”, one that lends supports to the dollar, is not to be ruled out. The interest rate decision and accompanying statement will be made public at 1900 GMT.

Before the completion of the Fed meeting, other data out of the US that will attract interest include January’s ADP national employment report (1315 GMT) on positions added to the economy by the private sector – this is often viewed as a precursor to the nonfarm payrolls report which is due on Friday – January’s Chicago PMI (1445 GMT) and pending home sales data for December (1500 GMT).

Interesting for loonie traders would be Canadian GDP data for the month of November and December producer prices out of the country. Both readings will be made public at 1330 GMT.

The EIA report including information on US crude and gasoline inventories for the week ending January 26 is due at 1530 GMT. Crude stocks are expected to increase by around 0.1 million barrels, after decreasing for ten straight weeks. This compares to a drawdown of around 1.1m barrels in the week that preceded.

In equity markets, AT&T, Boeing, Facebook and Microsoft will be among companies releasing quarterly earnings on Wednesday.