FX market outlook

FX market outlook

Posted on Tuesday, February 26 2019 at 9:49 am GMT+0000

Trade rally eases as caution sets in; Powell testimony eyed


· Risk rally eases amid some caution on prospect of US-China trade deal

· Immediate focus to shift to Fed Chairman Jerome Powell’s congressional testimony

· Pound jumps as May considers taking no-deal Brexit off the table

· Oil slumps after Trump tells OPEC to “take it easy” on high oil prices


Stocks pare gains; yen firms as trade rally fades

Equities were on the backfoot on Tuesday and the safe-haven yen turned higher as some of the optimism around the expectations of a US-China trade deal being announced soon subsided. While the US President, Donald Trump, was upbeat about holding another summit with China’s President Xi, saying “we’re going to have a signing summit”, he also appeared to play down the chances of a deal, adding that it “could happen fairly soon, or it might not happen at all”. Still, all the indications are that progress is being made in the negotiations, with the leaders of both countries eager to end the months-long trade dispute.

The dollar retreated from two-month highs of 111.23 yen scaled yesterday when the Japanese currency came under pressure from the risk-on sentiment. The dollar index was steady around 96.40, while the euro was flat at $1.1355.

The yen could gain further traction over the next couple of days if scheduled talks between President Trump and the North Korean leader, Kim Jong Un, don’t end well. Trump and Kim are due to hold a second round of denuclearisation talks in Vietnam on Wednesday but it’s unclear what outcome the meeting will produce. The US wants North Korea to give up its nuclear program, but Kim is insisting on sanctions against his country being lifted first.

The safe-haven gold could also see some volatility if there are any surprise outcomes from the summit. At the moment though, the precious metal was subdued at $1325 an ounce.

Pound surges as no-deal Brexit risks recede

The pound was outperforming all other majors on Tuesday on signs that British prime minister, Theresa May, is easing her stance on keeping no-deal Brexit on the table in order to appease the Remainers within her government. Newspaper reports suggest May is considering offering MPs a vote on whether or not to rule out a no-deal Brexit if her revised Brexit deal, which is still being renegotiated with the EU, is rejected when put to the vote by March 12.

Other reports say May will allow her cabinet to discuss the possibility of extending Article 50 on Tuesday and their decision will be revealed to Parliament later in the day. In another important development over the past 24 hours, the opposition Labour party said it will back holding a second referendum on the UK’s membership of the European Union.

With time fast running out for May to get her deal through Parliament and the EU not budging on its refusal to make changes to the backstop, an extension of Article 50 is looking inevitable. Sterling rallied to a near 4-week high against the dollar on Tuesday, touching $1.3161 as investors saw reduced odds of the UK crashing out of the EU.

Oil price slump weighs on commodity currencies

Commodity-linked currencies slid into losses on Tuesday as risk appetite ebbed slightly and oil prices slumped. Crude oil tumbled on Monday after Trump once again complained of excessive oil prices. Trump tweeted “Oil prices getting too high. OPEC, please relax and take it easy”, catching markets by surprise and triggering a sell-off. WTI and Brent crude fell by between 3-3.5% and were still struggling today. WTI was last down at $55.35 a barrel but Brent moved marginally higher at $64.81 a barrel.

The Canadian dollar extended yesterday’s losses against the greenback, with dollar/loonie rising to 1.3215 at the European open. The Australian dollar was down 0.3% at 0.7141 as investors eyed fourth quarter construction data due out of Australia later today.

Powell testimony to reinforce Fed patience

Fed chief, Jerome Powell will be the markets’ focus later on Tuesday when he testifies before the Senate Banking Committee in Congress at 15:00 GMT. Powell is unlikely to reveal anything new but may provide more clarity on the Fed’s plans to end the balance sheet unwinding later in the year.

Bank of England Governor, Mark Carney, will also be speaking before lawmakers at a hearing on the Bank’s latest inflation report at 10:00 GMT.