FX market outlook

FX market outlook

US dollar off highs while European PMIs, flash inflation on tap.

The US dollar index backed off a little from its 14-year high registered the previous day, as traders took stock of the greenback’s strong start to the New Year.  Manufacturing sentiment in the US, China, the UK and Japan seemed to confirm that the global economy was starting 2017 in a positive spirit, which augured well for further Fed rate hikes and an even stronger dollar.

The euro managed to reclaim the 1.04 level for now, having dipped to as low as 1.0340 the previous day; its lowest since 2003.  The euro did not receive much of a boost on Tuesday when it was announced that German inflation hit its highest since 2013.  The dollar failed to make a fresh high versus the yen, but the Japanese currency has seen particularly heavy selling since the US election and has been trading more or less flat around the 118 mark since the middle of December.

The Nikkei manufacturing PMI climbed to 52.4 in December from 51.9 the previous month, which signaled a brighter mood amongst Japanese manufacturers – most probably because of the recent drop in the yen.  Japanese stocks also benefited from the weak yen and the benchmark Nikkei 225 posted gains in excess of 2% during the first trading of the year (Monday and Tuesday were holidays in Japan).

The Australian dollar benefited from the positive mood in global markets as well as from news that China was enacting new capital outflow restrictions in order to protect the yuan from further weakness.  The aussie was trading around 0.7240 against the greenback.  The New Zealand dollar also managed to climb back above the 0.69 mark to 0.6925.

In energy, oil was trying to stabilize following a sharp sell-off during the US session that brought it down from its new 18-month high above $55 a barrel to $52.40.  Interestingly, gold was higher and trading above $1160 an ounce despite the dollar-bullish mood and positive risk appetite.

Looking ahead, the highlights of the day will come out of the Eurozone with final PMI business confidence numbers for December and Eurozone flash inflation.  UK construction PMI will also be released.  The US session will feature some data releases but they are unlikely to move the market much.