FX market outlook

FX market outlook

Posted on Thursday, January 5 2017 at 9:03 am GMT+0000

Sharp losses for US dollar as profit-taking accelerates.


The US dollar continued its corrective move from the previous day despite a slightly hawkish set of Federal Reserve meeting minutes released during Wednesday’s US session.

Dollar / yen moved sharply lower as it successively fell through the 117 and 116 handles during today’s session.  Dollar / yen was last trading at 115.86 in volatile trading.  Other Asian currencies also posted significant gains versus the dollar – not least the Chinese yuan.

The Chinese yuan provided for some excitement as it quickly rallied to a 2-month high versus the US dollar following gains yesterday and today.  Given the normally modest moves in the yuan exchange rate, the big moves were unexpected and contrary to the market’s expected path of gradual yuan depreciation.  In Chinese data, the country’s services PMI rose to 53.4 which represented the highest in 17 months.

The euro also capitalized on the weaker dollar to rise to 1.0550.  There were positive news for the Eurozone on Wednesday in the form of an upward revision in services’ activity indices as well as higher-than-expected flash inflation.  Sterling also topped 1.23 against the dollar and the aussie broke above 0.73 against the greenback.

Concerning US economic news, the minutes from December’s Federal Reserve meeting showed Fed officials more optimistic on US economic prospects given the President-elect’s promises of fiscal stimulus.  US vehicle sales also surpassed expectations on Wednesdaywhile all eyes will be on tomorrow’s employment report for December.

Looking further ahead, the President-elect’s press conference on January 11 as well as his inauguration on January 20 are very key for determining the fate of the so-called ‘Trump rally’.  Optimism about Trump’s future economic policies has pushed the dollar substantially higher since early November when he won the US election.  More details about such policies could either lead to a continuation or a partial reversal of the post-election move.

With respect to the remainder of Thursday, UK services PMI for December and Eurozone Producer Prices for November will be the key numbers out of Europe.  Out of the United States, weekly initial claims and the ADP payroll figures will be followed by the ISM services PMI and the weekly energy stocks.