FX market outlook

FX market outlook

US dollar softens as Fed begins final policy meeting of the year.

The Federal Reserve begins a two-day monetary policy meeting today and markets highly anticipate a rate rise of at least 25 basis points. This would be the first increase in a year.

US Treasury yields and the dollar have been rising in the buildup to the FOMC meeting. The benchmark 10-year Treasury bond yield jumped to a 2-year high on Monday before steadying. The greenback climbed to a fresh 10-year high of 116.11 yen yesterday but eased slightly to trade to as low as 114.72 in Asia today as investors re-position ahead of the big risk event of the Fed meeting later.

It is almost a foregone conclusion that the Fed will announce a rate increase when it concludes its meeting on Wednesday, so investors will also focus on the central bank’s inflation forecasts and guidance on interest rates going forward, and on the so-called “dot plot”. The Fed last increased rates in December 2015 and tomorrow it is expected to implement a marginal increase of 25 basis points to bring the Fed funds rate to a range of 0.5 percent to 0.75 percent.

China released better – than – expected data today but it had little impact on the markets as the Fed meeting is dominating market sentiment. China posted its strongest retail sales growth of the year in November as figures showed a 10.8 percent year-on-year rise in November from a year earlier, up from a 10.0 percent y/y increase in October. Industrial production jumped 6.2 percent year-on-year in November compared with a 6.1 percent y/y increase in the previous month.

Despite the upbeat Chinese data, the Australian dollar did not rise and it eased back down. The aussie briefly broke above the key $0.7500 level against the US dollar early in the session following the NAB business confidence survey which showed an improvement in November.

The euro gained over one percent on Monday to rise above $1.0600. In today’s Asian session, the single currency consolidated gains near yesterday’s high of $1.0650. Sterling was little changed in Asia and held onto Monday’s gains against the dollar after rising to test $1.2700.

Oil prices were a little softer in the Asian session, trimming gains made following the OPEC and non-OPEC agreements. WTI oil eased down to a session low of $52.52 a barrel, while Brent crude traded at $55.50.

Later in the day, focus will turn to inflation data out of Germany and the UK. Germany also releases the ZEW survey on economic sentiment.