FX market outlook

FX market outlook

Dollar regains some ground while sterling faces profit-taking after best day.

The US dollar rebounded somewhat during Wednesday’s Asian trading while the pound gave up some of its gains following its best 1-day performance in almost 20 years.

There were some conflicting influences on the greenback in recent sessions as certain Fed officials kept pointing to the need for more tightening in the New Year, while President-elect Donald Trump and his circle of advisers have begun to talk down the US currency.  On Tuesday, San Francisco Fed President John Williams said he saw a “good case” for three rate hikes this year even without fiscal stimulus and in the case of extra stimulus, it might be necessary to tighten policy even more than that.  Fed Governor Lael Brainard from her part warned about the inflationary dangers of fiscal stimulus in her speech.  New York Fed President William Dudley sounded more dovish by saying he didn’t see inflation as posing a problem and that the economy was “not growing much above its sustainable long-term pace.”

On the other hand, on the heels of President Trump’s weekend comments about the dangers of a strong dollar, a senior Trump adviser said in Davos that the US administration needed to be careful about the impact of a strong dollar both internationally and on the US.  The dollar nevertheless climbed from its 112.56 low against the Japanese yen to 113.30, while euro / dollar fell back below the 1.07 mark to 1.0678.

Elsewhere, in the aftermath Theresa May’s key Brexit speech on Tuesday, the pound backed off its highs following a very sharp upmove as a result of the speech.  The market seemed less worried about the pound with the lifting of some of the uncertainty over the goals that the UK would pursue during its upcoming negotiations with the EU.  However, the speech contained mainly the benefits the UK would seek and there was little mention of the potential costs.  Therefore, some of sterling’s move could also be attributed to a short-squeeze rather than just the fundamental factor of the lifting of some uncertainty.  Pound / dollar lost about a cent from its high above 1.24 to trade at 1.2328, while euro / pound was about 40 pips above its low at 0.8668.

Looking ahead, UK employment numbers and final Eurozone inflation for December will be closely watched during the European session.  Out of North America, US inflation and industrial production will be followed by the Bank of Canada’s rate decision, monetary policy report and Governor press conference.  Later today, a speech by Fed Chair Janet Yellen will be followed with interest by market participants, as it could give some hints as to the Fed’s assessment of the US economy and the next step in monetary policy.  The Fed’s Beige Book survey of regional economic conditions could also contain some useful information.