FX market outlook

FX market outlook

Posted on Thursday, January 26 2017 at 8:54 am GMT+0000

Dollar index stays below 100 while pound rallies to 6-week highs.


The US dollar remained under pressure because of various protectionist initiatives by the new US administration, while the pound rallied to 6-week highs on optimism of a quick trade deal between the UK and the US and progress on triggering Article 50.

Despite a rising US stock market as well as higher US Treasury yields, the dollar was unable to make headway as foreign investors were wary of Trump’s protectionist policies, according to analysts.  The new president authorized the beginning of the construction of a wall between the US and Mexico, while also preparing to block Syrian refugees from entering the United States as well as suspending the entry of immigrants from Muslim-majority Middle Eastern and African countries.

In more business-friendly gestures, Trump approved the construction of two key oil pipelines that would transfer oil from Canada to the US, while reducing regulations for manufacturers.  Hopes of pro-growth policies and positive corporate earnings reports helped US stock indices climb to all-time highs on Wall Street and the positive risk sentiment was carrying over to Asian and European markets on Thursday.  Safe haven gold was sold to below $1200 an ounce to 1195, but the yen held relatively firm as dollar / yen was at 113.60.

In economic data released during the Asian session, New Zealand inflation for the fourth quarter surpassed estimates by coming in at 0.4% quarter-on-quarter compared to 0.3% expected.  The annual rate of inflation at 1.3% came back within the central bank’s target range, which reduces the pressure for additional rate cuts from the RBNZ.  The New Zealand dollar shot up to 0.731 against the greenback following the release of the numbers, but came back down to 0.7271 near the end of the Asian session.

Finally, the pound was at its highest since mid-December against the US dollar, as pound / dollar climbed to as high as 1.2661 and euro / pound fell below the important 85 pence level to a 3-week low of 0.8486.  Optimism that the UK would conclude a quick trade deal with the United States as well as tabling a bill before parliament in coming days that would trigger Article 50, have boosted the British currency.  There were also expectations that the government would publish a white paper with its positions regarding the Brexit negotiations, which could further lift the uncertainty surrounding the UK economy.

Looking ahead, the first estimate of UK GDP for the fourth quarter will come out while in the United States, weekly jobless claims and new home sales for December will also be released.  No major speeches from central bank officials or other events were expected.