FX market outlook

FX market outlook

Posted on Friday, January 27 2017 at 8:57 am GMT+0000

US dollar makes comeback on growth optimism.


The US dollar clawed back some of its recent losses during Friday’s Asian trading on optimism about US economic prospects and as some market participants speculated that the dollar’s recent losses had gone too far.

The dollar index extended its run above the 100 mark to around 100.80 as the greenback posted solid gains across the board against other majors.  Euro / dollar was pushed below the 1.07 level down to 1.0662, while dollar / yen rallied above 115 to 115.18.  The pound also gave back some of its recent gains as pound / dollar fell back to 1.2545.  The Australian dollar was also under some modest pressure to trade at 0.7525; near the bottom of its range of the past 7 trading days.

The dollar was also posting major gains against the Mexican peso, as dollar / peso rebounded from the previous day’s low of 20.85 to rise to 21.37.  A planned meeting between the leaders of Mexico and the United States was scrapped following deep disagreement over a proposal by President Donald Trump to build a wall between the two countries with proceeds from a special tax on Mexican imports to the US.

Overall the market was keeping a close eye on the policies of the new US administration with some analysts optimistic that fiscal stimulus would help the economy grow faster while others feared that trade protectionism would end up hurting consumers, jobs and growth in the US.

In the day’s key economic numbers, Japanese core inflation for December was slightly better-than-expected at -0.2% year-on-year.  While the country remained in deflation, it was the smallest drop in core prices in 10 months.  Higher import prices because of a weaker yen and rising oil prices were behind most of the improvement.  In Tokyo in January, core consumer prices fell by -0.3%, also slightly better than analyst estimates of a -0.4% drop.  Despite the somewhat positive tone of the inflation news, the yen lost ground – not only against the dollar but also versus the euro at 122.82 and against the pound at 144.50.  Market participants will now turn their attention to the Bank of Japan’s 2-day meeting next week on Monday and Tuesday.

In other economic news, prices also firmed in Australia as producer prices for the fourth quarter rose at a faster pace compared to the previous quarter while both export and import prices for the same period came ahead of estimates.  In Europe, German import prices for December rose by 1.9% month-on-month, which was more than expected.

Overall the prospect of a pickup in inflation worldwide as a result of higher oil and commodity prices and decent global economic demand, could be an important factor to watch in the New Year.

Looking ahead to the rest of the day, Eurozone loan and monetary aggregates for December will be watched.  Later during the US session, durable goods orders for December and the advance estimate of fourth quarter GDP growth could move the market – particularly the GDP figures.  Finally, it is worth noting that the Chinese New Year holidays started today and markets in China will remain closed until Thursday, February 2nd.