FX market outlook

FX market outlook

Posted on Tuesday, April 23 2019 at 8:26 am GMT+0000

Earnings season fires up; aussie retreats

Written by Marios Hajikyriacos, XM Investment Research

– Nasdaq 100 at record highs ahead of key earnings

– Aussie pulls back ahead of inflation data early on Wednesday

– Sterling retreats as PM May prepares to stave off another ‘Tory rebellion’

Nasdaq 100 cruises to record highs as earnings season fires up

Markets remained quiet on Monday, with moves in both currencies and equities being muted overall, and the spotlight remaining on oil prices instead. US stocks closed mostly in the green, with gains in the energy sector offsetting losses elsewhere and dragging the S&P 500 (+0.10%) slightly higher. Meanwhile, the tech-heavy Nasdaq 100 (+0.31%) closed at a new record high, aided by advances in the likes of Facebook and Amazon, as investors loaded up ahead of earnings releases by both firms later this week.

Indeed, market focus will turn to corporate earnings from today. Notable names releasing their Q1 results include Coca Cola, Procter & Gamble, Verizon, and Twitter – all before Wall Street’s opening bell. It’s still relatively early in this earnings season so investors are looking for ‘bellwethers’ to gauge the broader picture. This implies that besides impacting their own stocks, the quality of corporate results today could well impact broader market sentiment as well.

Aussie retreats ahead of inflation data

The rally in oil prices was not enough to ‘lift all boats’ in the commodity sphere, as both the antipodean currencies – the aussie and the kiwi – are on the retreat this week. Given that risk sentiment has been modestly positive, the losses in these currencies seem owed to monetary policy expectations. It’s striking that markets have priced in one-and-a-half rate cuts by both the RBA and the RBNZ by year-end, which now seems a little out of sync with the signs of stabilization in China, for example.

For the aussie, the latest pullback likely reflects some profit-taking ahead of the release of Australia’s CPI data for Q1 at 01:30 GMT on Wednesday. Inflation is expected to have cooled and even though that would be discouraging, it still may not be enough to elicit a rate cut by the RBA without some deterioration in the labour market as well. The bottom line is that much pessimism is already priced in, so any positive surprise in these data could trigger a major re-think of the whole easing narrative.

Sterling inches down on rumors of ‘Tory rebellion’ against May

The British pound has been quietly moving lower in recent days, even in the absence of any material Brexit news, as the UK Parliament was in recess and talks between Conservatives and Labour to solve the impasse were paused for Easter. That all changes today, with British lawmakers returning to Westminster and the cross-party negotiations resuming. In other words, brace for a comeback of Brexit headlines.

The latest reports are not particularly encouraging, as it seems Theresa May has another ‘Tory rebellion’ on her hands. Leading Conservatives are calling for the Prime Minister to step down, and even though she is theoretically safe from a leadership challenge for several months still, it seems there may be some ‘alternative methods’ of removing her, assuming sufficient support. To be clear, even though the market reaction has been minimal so far, this is the biggest risk for sterling in the near-term; May being replaced with a hardline Brexiteer, as that would resurrect the no-deal risk.