FX market outlook

FX market outlook

Sterling steady after UK election tumble; euro up after French parliamentary elections.

Sterling has stabilized after Friday’s big tumble following the shock UK election result that has brought about political uncertainty. Prime Minister Theresa May was left with a minority government and reshuffled her cabinet over the weekend. Focus turns to the Brexit negotiations that begin in about a week. Meanwhile, the Bank of England holds a policy meeting on Thursday. This would be the next risk event for the pound, which continued to trade below the key $1.2800 level during the Asian session today.

Another key central bank meeting this week will be in the US, where the Federal Reserve is expected to raise interest rates by 25 basis points. While this move is mostly priced in by the markets, the FOMC’s forward guidance and Fed Chair Janet Yellen’s speech will be closely scrutinized for any hints of further rate hikes this year. A dovish tone by the Fed would weigh on the dollar, which has been gaining against the yen in recent days to rise back above the key 110-yen level. The pair was steady during the Asian session, trading around 110.25 yen. The dollar index gave back Friday’s gains to trade down to 97.06 in Asia.

The euro jumped higher after the legislative elections in France on Sunday which showed that President Emmanuel Macron’s party is set for huge parliamentary majority. The euro rose to an Asian session high of $1.1215. The single currency’s gains may be limited as markets look to the final round of voting which takes place next Sunday.

In other major currencies, the New Zealand dollar slipped against the greenback to $0.7170. The kiwi hit a three-month high of $0.7222 last week. The Australian dollar saw little movement due to a local public holiday, and it traded just above the $0.7520 level.

Economic data out during the Asian session showed Japan’s core machinery orders fell more than expected in April, down 3.1% month-on-month versus a 1.3% decline expected. This followed a 1.4% increase in March.