FX market outlook

Greenback eyes Fed Chair Powell’s speech

• Dollar flirts with 1½-year highs as Fed’s Clarida “sticks to script” on hikes; remarks by Fed Chair Powell today at 1700 GMT will be key
• Stocks briefly slip on rumors of car tariffs but recover on Kudlow’s optimism
• Pound remains under pressure as political uncertainty reigns

Dollar firms as Clarida “sticks to script”, and amid whispers of car tariffs

The greenback shined bright once again on Tuesday, with the dollar index soaring to come within breathing distance of its recent 1½-year highs. The initial catalyst for the gains were remarks by Fed Vice Chair Clarida, who maintained a broadly confident tone on the economy’s outlook and the prospect of future rate hikes, likely confounding some investors who had anticipated a more cautious stance.

The second wave of dollar strength came on the back of safe-haven demand, after reports that President Trump may impose tariffs on car imports as early as next week. The news likely generated speculation that even if a US-China truce is agreed this week, it’s unlikely to mark the end of the broader conflict as the next chapter may be an EU-US showdown considering Europe is all but certain to reply in kind to any tariffs.

Key events for the dollar continue today, as Fed Chair Powell speaks at 1700 GMT. Recall markets are currently only pricing in a little more than one rate hike in 2019. Hence, if Powell echoes a similar message to Clarida, hinting that raising rates three times next year is still “the plan”, then the dollar index could well sail past the 1½ year highs it is currently flirting with. The second estimate of US GDP for Q3 and new home sales for October are also due out.

Stocks slip on tariff rumors, but recover on Kudlow’s “optimism”

US stock markets took a hit after the reports Trump may impose tariffs on imported autos soon, briefly turning red on the day. However, the dip was short-lived and equities came roaring back to close the session higher, after White House top economic advisor Kudlow said “there is a good possibility we can make a deal”, referring to the upcoming Trump-Xi meeting. Risk-sensitive currencies like the aussie and kiwi moved in the same fashion as US equity indices.

In the big picture, while the two leaders may well reach a truce on Saturday that helps bring some short-term relief to the markets, it’s doubtful whether that will be anything more than a “pause” in an otherwise ongoing conflict. Neither side seems willing to blink on the big issue yet – forced intellectual property transfer.

Sterling remains in the doldrums as Brexit uncertainty reigns

The pound remained under selling interest, without any major Brexit developments to speak of. It seems “no news is bad news” out of the UK at the moment, as investors continue to grapple with the uncertainty over whether Parliament will reject the Brexit deal, and more crucially, what happens next if so. The consensus is that PM May does not currently command the numbers to pass it, and as long as that remains the general expectation, the pound will likely find it difficult to rally.

There are two caveats though, that could see the pound explode higher. The first is that one shouldn’t underestimate Theresa May; if anyone could somehow turn the Parliamentary tide, it’s her. The fact markets are increasingly pricing in a rejection makes it easier for the pound to surge if anything changes this narrative. Second, if the deal is rejected, while that may initially hurt the pound, it could also raise the probability for another referendum, any serious suggestion of which could see the currency soar.

Today, focus will turn to the Bank of England, which will release the results of banks’ stress tests 1630 GMT. This includes their performance under different Brexit scenarios, so investors will probably pay attention.

Other highlights for today

Beyond the above-mentioned US data, there are no other tier-one releases on the economic calendar.

In energy markets, the EIA will release its crude inventory data at 1530 GMT. Expectations are for another build in stockpiles, albeit a smaller one than previously.

Besides Fed Chair Powell, we have three ECB speakers on the agenda: Coeure (1205 GMT), Vice President Guindos (1300 GMT), and prate (1520 GMT).