FX market outlook

FX market outlook

Dollar backtracks slightly ahead of Trump inauguration; Chinese GDP in line.

The US dollar posted some modest losses during today’s Asian session, as a speech by Fed Chair Janet Yellen in Stanford sounded a little less hawkish than one given the previous day in San Francisco.  There was also uncertainty ahead of Donald Trump’s key inaugural address later in the day, where economic issues could be featured given Trump’s pre-election promises of more jobs and faster economic growth.

Chair Yellen stressed the need for a gradual approach to higher interest rates due to the risk of hurting the economy with too quick an adjustment.  She also pointed out that inflation is not really an imminent threat.  Euro / dollar traded around 1.0672, off the previous day’s low of 1.0588, after ECB President Mario Draghi said it was too early to start talking about a possible tapering of QE in the Eurozone, despite some improvement in economic growth and inflation.

Dollar / yen was at 114.73 after rising as high as 115.60 on Thursday.  Weekly jobless claims dropped to the very low level of 234 thousand according to the Labor Department while both housing starts and the Philly Fed Manufacturing Index surpassed expectations, which boosted the US dollar.

In other economic news, Chinese economic growth for the 4^th quarter came in at 6.8% year-on-year compared to expectations of a 6.7% number.  For 2016 as a whole, growth was at 6.7%, which was in line with the government’s target of 6.5-7%.  Industrial production and fixed asset investment slightly missed estimates but retail sales exceeded consensus.  The Australian dollar, which is the currency most sensitive to Chinese developments, initially rose to just below 0.7590 versus the greenback but then fell back to 0.7560.

Looking ahead, the UK will announce its retail sales, while during the US session, Canadian inflation for December will come out.  All eyes will be on President Trump’s inaugural address at 1700 GMT as investors have become wary of pushing either the dollar or stocks higher before they learn more policy details from the new President.  Fiscal stimulus, trade policy and foreign policy will all be in focus.