FX market outlook

FX market outlook

Posted on Tuesday, May 8 2018 at 8:42 am GMT+0000

Dollar little changed; Trump’s Iran decision in the spotlight

Here are the latest developments in global markets:

  • FOREX: The US dollar index, which gauges the greenback’s strength against a basket of six major currencies, was practically flat on Tuesday ahead of a speech by Fed Chair Jerome Powell at 0715 GMT. It touched its highest level in five months yesterday, as the euro (which has by far the biggest weight in this basket) declined following some lackluster data out of the Eurozone.
  • STOCKS: US markets closed higher yesterday. The tech-heavy Nasdaq Composite climbed by 0.77%, while the Dow Jones and S&P 500 advanced by 0.39% and 0.35% respectively. It should be noted, though, that all these indices gave back some of their early gains yesterday following a tweet from US President Trump that he will announce his decision on the fate of the Iran nuclear deal today, at 1800 GMT. Futures tracking the S&P, Dow, and Nasdaq 100 are all currently in positive territory, albeit marginally so. In Asia, most of the major benchmarks were in the green. In Japan, the Nikkei 225 and the Topix gained 0.18% and 0.37% correspondingly, while in Hong Kong, the Hang Seng surged 1.28%. In Europe, futures tracking the major indices were a sea of red, pointing to a lower open today.
  • COMMODITIES: Oil prices pulled back from their recent highs, with WTI declining by 0.8% and Brent by 0.7%, ahead of a decision by US President Trump today at 1800 GMT on whether the US will withdraw from the Iranian nuclear deal. Oil prices are likely to move according to the result; higher in case the US leaves and lower in case it doesn’t. It should be noted though, that markets seem positioned for the US to exit, so risks surrounding oil prices may be asymmetrical. A decision to stay in could generate a larger downside reaction than the corresponding upside one in case the US leaves, as it would probably come as a surprise (see below). In precious metals, gold prices are lower today, but by less than 0.1%. The yellow metal could also respond to the US announcement on Iran today, to the extent that such a decision increases or decreases geopolitical uncertainty in the Middle East.

Major movers: Oil eases off highs ahead of Iran announcement, euro loses ground

The US dollar continued to climb yesterday, touching a fresh five-month high before retreating somewhat. Euro/dollar declined notably, briefly breaking below the 1.1900 handle following some disappointing data out of the Eurozone. The Sentix investors’ sentiment index for May came lower than expected, likely amplifying the narrative that the bloc’s economy is slowing down, as the ECB alluded to at its latest policy meeting. Euro/yen and euro/pound experienced similar retreats.

Today, all eyes will be on the US, where President Trump is expected to announce his decision on the Iran nuclear deal, at 1800 GMT. Under this deal, Iran agreed to limit its nuclear research in exchange for the easing of sanctions on its economy, and if the US pulls out of the accord today, that would likely involve re-imposing sanctions. Oil prices have rallied significantly in recent weeks on speculation for such an outcome, as new sanctions on Iran could remove a substantial amount of oil supply from the market.

Should the US indeed leave the deal, then prices could spike higher on the announcement. That said though, one must also sound a note of caution. Oil has already rallied substantially, which suggests that most of the “sanctions” narrative is already priced in. Thus, while an official confirmation could push prices a little higher from current levels, anything other than that may come as a surprise and hence, trigger a much sharper negative reaction in prices. For instance, if the US decides to give Iran another chance, or if the sanctions are watered down and are smaller than previously, then it wouldn’t be a surprise to see a “sell the fact” reaction in oil, since investors already “bought the rumor”.

Besides oil, this decision could impact broader market sentiment as well, perhaps triggering reactions in safe haven assets. A potential imposition of additional sanctions on Iran could lead the nation to threaten restarting its nuclear program, thereby raising geopolitical uncertainty in the Middle East. In this sense, a US withdrawal from the accord could prove beneficial for the likes of gold and the Japanese yen, and vice versa.

Day ahead: US JOLTS job openings and Canadian housing starts due, with Trump’s take on Iran nuclear deal in focus

US JOLTS job openings and housing starts data out of Canada are some of the releases attracting attention out of Tuesday’s calendar. However, geopolitics – the US administration’s stance on the Iran nuclear deal – seem more likely to drive positioning during today’s trading.

The Swedish central bank will be publishing the minutes from its latest monetary policy meeting at 0730 GMT, while the Bank’s Deputy Governor Per Jansson will be talking on the economy and monetary policy one hour later. In this respect, krona pairs will be in focus.

Also at 0730 GMT, house price data for April will be made public out of the UK. The Halifax House Price Index is expected to show a 0.2% m/m decline in prices, after a 1.5% gain in March, which constituted the fastest growth in prices since August.

Canadian housing starts data for the month of April are scheduled for release at 1215 GMT, while the US will see the release of JOLTS job openings figures for March at 1400 GMT. The number of openings is anticipated to come in at 6.1 million, roughly 50k more than in February.

With oil prices trading around their highest since late 2014, the API’s weekly report on crude oil stocks will be watched when it hits the markets at 2030 GMT. Of more importance though, will be President Trump’s decision on the Iran nuclear deal – whether to withdraw from the deal and impose fresh sanctions on Iran. In a tweet yesterday, the US President said he will make an announcement on the issue today after 1800 GMT.

In equities, Walt Disney is among companies releasing quarterly results today. It should be kept in mind though that besides corporate earnings, the Trump administration’s decision on Iran can also act as a major driver of equity market sentiment.

Fed Chair Jerome Powell is participating in a panel discussion on “Monetary Policy Influences” hosted by the Swiss National Bank and the IMF. The discussion has started at 0715 GMT.

In US politics, the outcome of primary election battles in Indiana, North Carolina, Ohio and West Virginia will be known by Tuesday night. These will determine those individuals running for the midterm elections in November; President Trump has favored certain candidates.