FX market outlook

FX market outlook

Aussie drops following inflation; US dollar in uneasy calm.

The US dollar declined a little but then rebounded back to almost unchanged during today’s Asian session, as traders were still trying to weigh the impact of the new administration’s trade and economic policies.

The dollar index traded in a relatively narrow range of 100.15 to 100.41 while there were few new developments out of the United States.  Existing home sales for December dropped 2.8% instead of a drop of only 1.1% expected by economists, but the miss was mostly attributed to shrinking housing inventory rather than weakness in the housing market.  Elsewhere, Markit Manufacturing PMI for the US surpassed estimates by rising to 55.1 from the previous month’s 54.5 figure.

During the Asian session, Australian inflation for the fourth quarter missed estimates by coming in at 0.5% quarter-on-quarter compared to estimates of a 0.7% rise.  The year-on-year increase was at 1.5%.  Measures that the Reserve Bank follows more closely such as the weighted median and the trimmed mean were at 1.5% and 1.6% year-on-year respectively.  These were well below the RBA’s 2-3% target and this rekindled some talk of a possible rate cut from the present 1.50% level.  The Australian dollar posted significant losses as a result and traded as low as 0.7526 against its US counterpart.  It was near its session lows at the time of writing.

Sterling was relatively steady above 1.25 at 1.2510 against the greenback as the Supreme Court ruling on Brexit was seen as opening the door for Theresa May’s government to proceed with a motion to parliament to trigger Article 50 soon.  This would start negotiations between Britain and the EU and it would lift some of the uncertainty surrounding the UK’s economic future.  However this would also open up new questions regarding the exact future economic relationship between the EU and the UK.

Looking ahead to the remainder of the day, the IFO German business confidence indicator for January will be released.  There will be little else in the way of economic numbers.  Some speakers from the ECB such as Lautenschlager and Praet will be speaking later in the day.