FX market outlookPosted on Wednesday, February 21 2018 at 9:57 am GMT+0000
Dollar continues to recover ahead of Fed minutes; eurozone PMIs & UK employment data in focus
Here are the latest developments in global markets:
- FOREX: The dollar index was nearly 0.2% higher on Wednesday ahead of the release of the FOMC minutes, extending the notable gains it posted yesterday.
- STOCKS: US equity markets closed lower on Tuesday. The Dow Jones fell the most, closing 1.0% lower, while the S&P 500 declined by 0.6%. The Nasdaq Composite retreated as well, but by less than 0.1%. The volatility index (VIX) also moved up, suggesting that the recent turmoil in equity markets is not done yet. In Asia, Japanese markets were mixed as the Nikkei 225 rose 0.2%, but the Topix closed marginally in the red. In Hong Kong, the Hang Seng surged by 1.8%, while markets in mainland China remain closed as Lunar New Year celebrations continue taking place. In Europe, futures tracking the Euro STOXX 50 and most of the major equity indices were in negative territory, suggesting they could open lower today.
- COMMODITIES: Oil prices fell on Wednesday, with WTI and Brent crude declining by 1.1% and 0.7% respectively. With no major news in the oil market, the pullback is probably owed to the recovery in the US dollar. Since oil is traded in dollars, it becomes less attractive for investors using other currencies when the greenback strengthens. As for potentially market moving events, the API inventory data are due later on Wednesday. In precious metals, gold was 0.3% lower, last trading near $1327 per ounce. Gold is denominated in dollars too, and thus also becomes less appealing when the US currency gains.
Major movers: Dollar rebound continues ahead of FOMC minutes; sterling catches a bid on Brexit reports
The dollar continued to recover yesterday as the yields on two-year US Treasuries surged to reach 2.26%, a high last seen in 2008. Besides movements in the bond market, the dollar’s gains may be partly owed to investors covering some of their short-dollar positions ahead of the release of the FOMC minutes later today. The minutes will be closely watched as markets try to gauge whether the broader USD weakness has run its course for now, or whether this is just a reprieve before the next leg lower.
The statement accompanying the policy decision back then was changed only slightly, but those changes were perceived as being hawkish, as they indicated more confidence in the inflation outlook. Should the minutes reflect an equally optimistic bias, and perhaps show that the Committee discussed the prospect of faster rate hikes in light of the recently-passed tax overhaul, then the greenback’s rebound could well continue.
The British pound caught a bid yesterday, after a media report suggested that the European Parliament is preparing legislation aimed at allowing Britain to retain “privileged” access to the single market after Brexit. The report likely caught markets by surprise, as EU negotiators have repeatedly said the UK could only have limited access to the single market if it does not adhere by EU regulations after the divorce. If this is indeed confirmed by official EU sources in the coming days, it would mark a clear shift in the Brexit negotiating landscape. From a market perspective, it would likely heighten speculation that Britain may indeed manage to secure a favorable trade deal, and perhaps unleash the next wave of Brexit-related sterling appreciation.
Overnight, Australia’s wage price index for the fourth quarter surprisingly accelerated, reaching 2.1% in yearly terms. This is a positive development for the RBA as it shows that wages are slowly but surely picking up speed. While aussie/dollar spiked higher on the news, it quickly gave back its gains to trade 0.5% lower in the following hours. The pair’s inability to sustain its gains was likely owed to the other piece of data released alongside wages; construction work. It fell by much more than expected in the fourth quarter, likely generating speculation that the economy may have lost some momentum.
Elsewhere, the yen lost some ground against its major counterparts after Japan’s top currency diplomat, Masatsugu Asakawa, said that he views the yen’s recent surge as excessive, and that the recent movements were one-sided.
Day ahead: Eurozone PMIs, UK unemployment & wage growth, US existing home sales & Fed minutes on the agenda
Flash eurozone PMI figures for the month of February for the manufacturing and services industries, as well as the composite measure that blends the two sectors, are due at 0900 GMT. The numbers for all three are expected to slightly ease relative to January, though still remain comfortably in expansion territory above 50 and continue to support the view that growth in the euro area is picking up steam. The data have the capacity to move the euro.
Sterling pairs would be eyed next as UK data on employment and wage growth for December will be made public at 0930 GMT. The unemployment rate is projected to remain at a four-decade low of 4.3%, with the economy expected to have added 173k workers in the three months to December. Particular attention would be falling on average weekly earnings as they’re seen – in case they come in strong – as having the ability to push the Bank of England to hike rates again sooner rather than later. The three-month average of earnings (both including and excluding bonuses) is anticipated to have risen at the same pace as the previously recorded data; 2.5% y/y including bonuses and 2.4% excluding them.
Out of the US, existing home sales data for the month of January due at 1500 GMT will be attracting interest. Sales are anticipated to expand by 0.9% m/m after December’s decline by 3.6%. It should be stated though that last month’s decline was attributed to record low supply of houses driving prices higher and thus discouraging some potential first-time buyers to purchase a house, rather than to intrinsically weak demand. A little earlier (1445 GMT), Markit’s flash manufacturing PMI for the month of February might also attract some attention out of the US.
But perhaps having the highest likelihood of spurring positioning on the dollar will be the official record of Janet Yellen’s last meeting at the Federal Reserve. Fed minutes pertaining to the late January meeting will be released at 1900 GMT, with a hawkish tilt in FOMC members’ views having the ability to maintain the short-term positive momentum for the greenback.
Market participants are also watching the outcome of this week’s US government debt auctions amid concerns of ballooning budget deficits and debt levels.
In policymakers’ appearances: the Swedish central bank Deputy Governor Per Jansson will be talking about the economy and monetary policy at 1030 GMT. Philadelphia Fed President Patrick Harker – a non-voting FOMC member in 2018 – is scheduled to speak on the US economic outlook at 1400 GMT. Bank of England Governor Mark Carney, Deputy Governor Ben Broadbent, chief economist Andy Haldane and Monetary Policy Committee external member Silvana Tenreyro will be answering lawmakers’ questions relating to the central bank’s February Inflation Report at 1415 GMT.
Oil traders will be paying attention to API data on US crude stocks scheduled for release at 2130 GMT.
In politics, a meeting taking place today that could touch on Brexit issues is the one between UK PM Theresa May and Dutch PM Mark Ruttee.
In equities, companies releasing quarterly results will be in focus.