FX market outlook

FX market outlook

Posted on Monday, April 8 2019 at 8:28 am GMT+0000

Fed rate-cut bets grow; oil climbs on Libya woes

– Dollar little changed after NFP, but Fed rate-cut odds rise

– In the UK, reports suggest PM May could accept a customs union compromise

– Oil touches five-month high as Libyan production is threatened

Dollar snoozes after mixed jobs data, but rate-cut bets grow

The US payrolls report for March was a mixed bag. Nonfarm payrolls clocked in at 196k, higher than the consensus for 180k, but wage growth disappointed, with average earnings surprisingly slowing to 3.2% in annual terms, from a cycle-high of 3.4% in February. The unemployment rate held steady as projected. The dollar was little changed, but upon closer inspection, it appears the market saw this as a soft report overall, something evident by the implied probability for a Fed rate cut by December climbing to ~80% in the aftermath.

Stock markets, for their part, liked the weak data. The S&P 500 (+0.46%) index closed at a fresh six-month high and is now less than 2% away from reaching its all-time high, even despite signs the US economy is slowly but surely losing steam. While this is owed to growing expectations for looser monetary policy, it also implies cause for caution, as economic fundamentals and equity prices seem to be diverging – something that can’t continue indefinitely. Looking ahead, the next key event for both the dollar and stocks may be the release of US inflation data on Wednesday, though any updates in the trade saga could also prove critical.

Reports suggest May could accept customs union – pound doesn’t ‘buy it’

It will be a big week for the British pound as well. EU leaders will meet on Wednesday to approve or disapprove another extension to Brexit. Theresa May has requested a short extension to June 30, but the EU is quite unlikely to accept that, and may instead only offer a long extension until the end of the year.

Meanwhile, talks between May and opposition leader Corbyn continue in an attempt to find common ground and break the deadlock. Reports this morning suggest that May could compromise and accept a customs union arrangement. The pound has so far not reacted much, perhaps due to the risk of a no-deal exit on April 12 still lurking beneath the surface, but any clear signs for either a customs union or a long extension could benefit the currency.

Oil logs more gains as escalation in Libya threatens supply

The oil market has been on a tear in recent weeks, with both Brent and WTI prices extending their recent gains to touch fresh five-month highs on Monday, helped mainly by supply factors. OPEC officials have been vocal that they stand ready to extend their supply cuts, US sanctions against Iran are set to go into full effect next month, and US production itself has been rising slower than previously expected.

Meanwhile, the situation in Libya remains highly unstable, with the capital Tripoli currently under siege. Libya’s oil production had been slowly recovering in recent months, and the ongoing conflict poses the risk that it may fall drastically again, which by extend spells upside risks for oil prices in the near term.