FX market outlook

FX market outlook

Dollar holds gains as markets digest Fed’s hawkish rate hike outlook.

The US dollar stalled its Fed-driven rally and consolidated against most of its major counterparts in a relatively quiet Asian session. The FOMC’s decision on Wednesday to raise rates and quicken its pace of hiking has taken the US dollar index to a 14-year high.

A string of US economic releases on Thursday lent support to the dollar as improving data help reinforce more interest rate increases from the Fed next year.

US CPI rose 1.7% year-on-year in the November, which matched expectations. Other economic releases were more upbeat with the Philly Fed rising to 21.5 from 7.6. The NAHB home builder index also rose to 70 from 63 to match the best level since 2005.

The hawkish Fed rate hike outlook pushed US Treasury yields higher and boosted the attractiveness of the dollar. The benchmark 10-year Treasury note yield rose above 2.6% on Thursday to its highest level since September 2014.

Due to interest rate differentials, the dollar gained against the yen to reach a more-than 10-month high of 118.65 yen yesterday. In today’s Asian session the dollar held onto gains and consolidated just above the 118-yen level. The US currency is on track to end the week with a more than 2% gain.

The rise in the dollar index pushed the euro to its lowest level in more than a decade on Thursday, to touch a low of $1.0365. The euro was little changed against the dollar in Asia today and traded a range between $1.0405 and 1.0447. Focus turns to Eurozone inflation data later in the day but the strength of the dollar may overshadow any data and the single currency is like to remain under pressure due to the hawkish Fed and higher US rates.

The pound consolidated losses after slipping to a 3-week low of $1.2375 yesterday.  Sterling was down 1.4% for the week.

The stronger dollar and higher US rates weighed on gold prices. The precious metal slid to a 10-month low of $1122.66 an ounce on Thursday. There was a slight bounce in the Asian trade today to a session high of $1135.07.

Oil prices were also impacted by the jump in the dollar but saw some respite today. Brent crude, the international benchmark, rose to $54.32 a barrel in Asia, while WTI climbed to $51.23.

For the rest of the day, the markets will await Eurozone CPI data and US Building permits and housing starts.