FX market outlook

FX market outlook

Posted on Wednesday, February 20 2019 at 9:48 am GMT+0000

Dollar retreats ahead of Fed minutes; pound soars

  • Greenback pulls back on expectations for ‘dovish’ Fed minutes today
  • Pound outperforms, soars back above $1.30 without Brexit news
  • Gold sails past 10-month highs amid a quiet flight to safety

Dollar retreats as traders brace for ‘dovish’ Fed minutes

The dollar gave up some early gains on Tuesday to close the session much lower overall against a basket of six major currencies, as US traders returned to their desks after a holiday. While this retreat started without a clear catalyst, some cautious-sounding remarks by Fed officials likely exacerbated it. Cleveland Fed chief Loretta Mester, who is typically an arch-hawk, joined the chorus of worried officials and indicated she’d be comfortable allowing the balance sheet unwinding to come to a stop soon. Likewise, the influential President of the New York Fed, John Williams, said he’d only back more hikes if the outlook changes to the upside.

This caution – particularly from a hawk like Mester – probably amplified speculation for a cautious tone in the Fed minutes of the January meeting, which will be released today at 19:00 GMT. Yet, considering that market pricing already implies a small probability for a Fed rate cut this year, it’s difficult to envision any major weakness in the dollar even if the minutes are on the dovish side; that much is expected already.

On the trade front, reports suggest the US is trying to obtain a guarantee from China that it will keep the yuan stable – or in other words that it won’t devalue it any more – as part of the trade negotiations. The news sent the yuan surging, consequently weighing on the dollar.

Sterling skyrockets, even without a clear trigger

The British pound was the star performer on Tuesday, with Cable jumping by more than one big figure to trade back above the $1.30 handle, without any material news. Sure, there were reports that some pro-remain Tory MPs may follow in the footsteps of their Labour colleagues and quit their party, and that May could soon lose the support of hardline Tory Brexiteers. Yet, spinning these into a positive for sterling truly requires an exercise in mental gymnastics, implying that the surge may have been more technical in nature, driven mainly by flows as opposed to news.

PM May will head to Brussels today to meet European Commission chief Juncker, in an attempt to secure concessions on the Irish backstop. Even if the EU grants any, they will most likely not be legally-binding, and so are unlikely to satisfy UK lawmakers. Hence, uncertainty over what happens next remains heightened, with the only ray of hope – for the pound – being that Parliament could force May to seek an extension of Article 50, when lawmakers vote again next week.

Stocks steady, but gold sails past 10-month highs

US stock markets ended the session practically flat yesterday, with the S&P 500 (+0.15%) and the Dow Jones (+0.03%) struggling to make headway. In contrast, gold prices soared to fresh 10-month highs, with bullion now trading at $1343/ounce. While a weaker US currency definitely contributed, it wasn’t the principal catalyst for this rally, as gold had already broken higher while the dollar index was still safely in the green.

It’s especially interesting that the correlation between gold and the dollar has diminished lately, which implies that a flight to safety is quietly going on, as movements in the US currency no longer explain moves in gold. Overall, the outlook for gold is clearly positive, though for buyers to challenge and pierce above the elusive $1365 area, some more ‘fuel’ may be needed, such as an escalation in market growth concerns or a meaningful retreat in the dollar, or both.