FX market outlook

The US dollar was weak across the board in today’s Asian session in reaction to headline news that US national security adviser Michael Flynn resigned after allegations of having inappropriate links with Russian officials before President Trump too office.

Flynn is accused of illegally discussing US sanctions with the Russian ambassador to the US. He failed to disclose the full extent of his conversations with Russian officials and there are concerns that he was giving signals to Moscow that Donald Trump would take a softer stance against Russia.

The dollar fell from an early Asian high of 113.80 yen to a session low of 113.25 where it found support and bounced back up.

In the session’s economic news, Chinese price indices accelerated their increase during January mainly as a result of rising energy and fuel prices.  Producer prices rose at their fastest annual pace in almost 6 years by coming in at 6.9% compared to 5.5% the previous month.  The expectation was for an increase of 6.3%.  Consumer inflation from its part only slightly beat expectations at 2.5% against 2.1% the previous month and 2.4% that was expected by analysts.  Chinese inflation is not yet so worrisome and high inflation could subside in coming months.  However, these inflation readings could cause some policy tightening in the future as the PBOC did tighten policy earlier in the month.

In other economic data, Japanese industrial production for December rose by 0.7% month-on-month, which was better that estimates for a 0.5% increase.  In Australia the NAB business confidence survey was overall upbeat in January compared to December.  This helped the aussie rise against the greenback to a session high of $0.7683 from a low of $0.7633.

Out of Europe, German growth for the fourth quarter was slightly lower-than-estimates at 0.4%.  The year-on-year pace was only 1.2% compared to estimates of a 1.7% increase.  Nevertheless, 2016 was a strong year for the German economy as it registered growth of almost 2%; its strongest showing for the past 5 years. The euro fell after the data from a high of $1.0623 to $1.0606, trimming half of the Asian session’s gains.

The day’s key event will be the testimony of Fed Chair Janet Yellen before the Senate.  Yellen’s testimony will be scrutinized for hints of how many times the Fed is planning to hike this year.  The market is currently attaching a low probability of a rate hike in March due to uncertainty surrounding President Trump’s fiscal policies, on which the Fed would like some clarity before it embarks on more action.  Hawkish talk by Yellen and a higher possibility of a March rate hike could boost the dollar, since the market right now is expecting the Fed to ‘sit out’ that particular meeting.

In terms of economic data, focus will be on UK inflation data, Eurozone GDP and US production prices.