FX market outlookPosted on Wednesday, February 28 2018 at 9:38 am GMT+0000
Powell’s comments breathe life back into the dollar; eurozone inflation eyed
Here are the latest developments in global markets:
- FOREX: The dollar index – which tracks the greenback’s performance against a basket of six major currencies – traded almost unchanged on Wednesday, after posting significant gains earlier on Tuesday as the new Fed Chair Jerome Powell appeared quite optimistic on the US’ growth outlook in his testimony before Congress.
- STOCKS: US markets posted notable losses yesterday, as the upbeat remarks of the new Fed chief enhanced expectations for higher interest rates. The S&P 500 led the decline, falling by 1.3%, while both the Dow Jones and the Nasdaq Composite tumbled 1.2%. Futures of the S&P, Dow, and Nasdaq 100 were all in the red today, albeit marginally so. The negative sentiment rolled over into Asian trading today as well. In Japan, the Nikkei 225 and the Topix fell 1.4% and 1.2% respectively, while in Hong Kong, the Hang Seng traded 1.6% lower. Futures tracking the major European indices were also a sea of red, signaling that these benchmarks could open lower today.
- COMMODITIES: In energy markets, oil prices were lower today, with WTI and Brent crude falling 0.4% and 0.3% accordingly, as the dollar’s rebound decreased the appeal of the dollar-denominated precious liquid, while the IEA warned about rising US shale production. In terms of upcoming oil market events, traders will keep their gaze locked on the weekly EIA inventory data, which will be released later today (1530 GMT). In precious metals, gold tumbled yesterday as the US dollar recovered. The yellow metal fell as low as $1313/ounce, before it managed to stabilize and recover somewhat, last trading near the $1317 handle.
Major movers: Dollar regains ground as new Fed Chair appears hawkish
Speaking before the House Finance Services Committee yesterday, Fed Chair Jerome Powell appeared quite hawkish, sending US Treasury yields and the dollar higher, while stocks moved lower. He appeared upbeat on the broader economy, and also hinted at the prospect of faster rate hikes this year than what the Fed penciled in back in December. Asked whether the recent fiscal stimulus could spur more than the projected 3 rate hikes in 2018, he replied that his own personal outlook has indeed strengthened since December. Although indirectly, Powell’s confident remarks add credibility to expectations that the FOMC is shifting towards a more optimistic bias.
In the aftermath of these hawkish signals, markets have fully priced in 3 quarter-point rate increases by the Fed in 2018, helping the dollar index to reach a two-and-a-half week high. However, it remains to be seen whether this was the beginning of a sustained recovery in the greenback, or whether the rebound will turn out to be short-lived. The dollar has had a difficult time holding onto gains recently. Not only have markets grown increasingly more concerned about the health of US public finances, but foreign central banks have also moved to tighten their own policies, increasing the appeal of other currencies.
It will be interesting to see if USD bulls can remain in charge. In this environment, technical levels and patterns are worth keeping a very close eye on. The dollar index has almost completed a double bottom formation on the daily chart, and if it manages to break decisively above the 90.50 barrier, that could be a signal for larger upside extensions.
Elsewhere, there was relatively little movement in the FX market. Dollar/yen gave back its Powell-related gains during the Asian session Wednesday, as the declines in stock markets likely led investors to seek the safety of havens like the yen.
In politics, the British pound barely reacted to some downbeat comments by the EU’s chief negotiator Michel Barnier yesterday. The official said that there are still significant differences between the two sides on the Brexit transition deal, echoing comments he made earlier in the year.
Day ahead: Eurozone inflation in focus; US updated Q4 GDP figures due; Brexit developments eyed
Krona pairs will be attracting interest as Sweden releases Q4 2014 GDP figures as well as retail sales numbers at 0830 GMT.
Eurozone flash inflation figures for the month of February are scheduled for release at 1000 GMT. Both headline and core CPI – that excludes volatile food and energy items from its calculations – are anticipated to ease on an annual basis. The numbers will constitute the last inflation input ahead of the ECB meeting concluding on March 8 and thus their perceived importance might be amplified by market participants, with a deviation from expectations potentially leading to sharp movements in euro pairs; of course, the extent of any such deviation is also of importance.
Earlier on Wednesday (at 0900 GMT), Germany will see the release of unemployment data for the month of February. The unemployment rate is projected to remain at 5.4%, its lowest since German reunification in 1990. The eurozone’s respective rate will be made public on Thursday.
Out of the US, updated – the second reading – Q4 2017 GDP numbers are scheduled for release at 1330 GMT. Analysts project a slight downward revision from the advance estimate of 2.6% on an annualized basis, to 2.5%. Preliminary Q4 GDP deflator (this gauges the level of prices of all new, domestically produced, final goods and services) and core PCE price data will be made public at the same time. February’s Chicago PMI (1445 GMT) and pending home sales for the month of January (1500 GMT) will be also be generating some interest.
Canadian producer prices for the month of January are due at 1330 GMT.
New Zealand terms of trade data for Q4 2017 will be made public at 2145 GMT.
Brexit developments to which sterling has proved highly sensitive in the past are again on the forefront. The European Union will be publishing a draft Brexit treaty later on Wednesday. Also in politics, the seventh round of NAFTA negotiations is attracting interest.
In energy markets, the Energy Information Administration’s (EIA) report including information on US crude and gasoline inventories for the week ending February 23 is scheduled for release at 1530 GMT. Crude inventories are anticipated to increase by 2.4 million barrels in the period of coverage after unexpectedly falling by around 1.6m barrels during the previously tracked week.
In equities, companies continue to report earnings as some investors are repositioning in response to rising expectations for a higher interest rate environment.