FX market outlook

FX market outlook

Posted on Tuesday, February 19 2019 at 9:37 am GMT+0000

Markets quiet as trade talks resume

  • Markets quiet as new round of trade talks kicks off
  • Sterling unfazed as Labour MPs split, looks to UK jobs data today
  • Yen ticks down after BoJ chief teases further easing

Subdued market moves ahead of fresh negotiating round

Stocks in Asia are mostly in the green on Tuesday, albeit only modestly so, while US markets remained closed on Monday for a public holiday. Moves in the FX market were equally subdued to kick off the week, with price action in most major pairs remaining confined in relatively tight ranges. The euro outperformed despite the ECB’s chief economist, Peter Praet, being the latest to join what seems like a coordinated effort to prepare markets for a dovish shift, indicating the Bank could “adapt” its forward guidance if the economy slows further.

Today may be more exciting though, as the US-China trade negotiations will resume in Washington. This round will also commence with deputy-level talks, before senior officials take over on Thursday, much like how last week’s discussions played out in Beijing. Recent price action implies that traders believe a deal is inching closer, as both sides are clearly thirsty for one. Yet, the fact that the latest round of talks wrapped up without either side providing any details on what progress was made is a red flag, and suggests some cause for vigilance, as much optimism is baked into stock prices already without any concrete evidence of progress.

Sterling unfazed as seven lawmakers quit Labour Party

UK politics were once again in focus, following news that seven Members of Parliament (MPs) representing the opposition Labour Party will break away from the Party over disagreements around the handling of Brexit, among other issues. Yet, the pound was unfazed by the news, as market participants judged that this is not a meaningful change in the Brexit landscape.

Today, UK employment data will hit the markets. Expectations are for a strong report overall, which may support the pound a little. That said, Brexit remains in limbo, with PM May still trying to squeeze some last-minute concessions from the EU, which probably won’t be legally-binding and hence not game changing. As such, uncertainty is set to remain elevated, which implies that any data-induced rallies in sterling may remain limited until the political fog clears a little. In this respect, the next date to watch is February 27, when Parliament will vote on amendments that could forcethe government to take certain actions, like extending Article 50.

Yen barely retreats after BoJ’s Kuroda teases further easing

Overnight, some dovish remarks from BoJ Governor Kuroda made headlines. Firing a warning shot at yen bulls, the BoJ chief said his central bank will considering further easing of policy in case FX moves start to hurt the economy or threaten inflation. The reminder was enough to push the yen slightly lower, though the move was admittedly small.

Day ahead: Germany’s ZEW survey, ECB speakers, and Australian wage data

The schedule is relatively light today as well. On the data front, besides the UK employment figures, Germany’s ZEW survey for February could also attract some attention, as it will provide the first glance at whether sentiment in Europe’s largest economy continues to weaken, or not.

In terms of speakers, ECB Vice President Luis de Guindos (10:15 GMT) and chief economist Praet (15:00 GMT) will both deliver remarks.

On the earnings front, Walmart is among the key names releasing their results today.

During the early Asian session on Wednesday, focus will turn to Australia, where the wage price index for Q4 will be released.