FX market outlook

FX market outlook

Dollar subdued ahead of Fed; oil jumps on inventory decline.

The US dollar traded a narrow rage against the yen as investors await the outcome of the Federal Reserve’s two-day policy meeting later today. It is widely expected that the FOMC will announce a rate hike. The euro tumbled against the pound as markets look to the Dutch elections taking place today.

Data out of Japan during the Asian session was shrugged off by the markets as today’s risk events are the main focus. Japan’s industrial output fell 0.4% month-on-month in January, recording a smaller decline than the previous month and from what was expected.

The dollar index, which measures the US currency’s strength against major currencies, was last trading down from yesterday’s close of 101.70.

Caution amongst investors ahead of the Fed is keeping price action on the greenback relatively subdued.  The Fed is expected to increase interest rates by at least 25 basis points, which is widely expected, so forward guidance will be more important. Investors will be watching Fed Chair Janet Yellen’s press conference closely for any clues on the US central bank’s rate hike path. Additionally, market players will look at the so-called “dot plot” of where FOMC members expect interest rates to go. It currently indicates three rate increases this year. The Summary of Economic Projections will also be critical.

Dollar / yen traded a range between 114.62 and 114.87 during the Asian session.

The euro managed to trim some of yesterday’s losses made against the dollar when it came under pressure on market jitters surrounding the Dutch elections today. A recent row with Turkey has intensified nationalism in the Netherlands and helped the far right and anti-euro PVV party of Geert Wilders to gain in the polls. Euro / dollar remains above the key 1.0600 level and was last at 1.0638.

Sterling jumped against the dollar to a session high of 1.2255, which led to euro / pound crashing below 0.8700. The British currency has been quite volatile in recent days due to uncertainty over Brexit. The spike in the pound was not sustained though as focus now shifts to risk events for the currency, which include the UK jobs report due later today and tomorrow’s Bank of England policy meeting.

In commodities, gold prices moved higher to rise back above the key $1200 an ounce level, as the precious metal was supported by safe haven buying ahead of risk events. Oil prices jumped after industry data showed a surprise drop in US crude stockpiles. Yesterday, the American Petroleum Institute (API) reported a fall of 531,000 barrels versus a 3-million-barrel build. WTI oil rose to an early session high of $48.83 a barrel before steadying. Later in the day, another report is due from the Energy Information Administration (EIA).

Looking ahead to the rest of the day, UK jobs data will be the main focus during the European session, while from the US, data are expected on inflation and retail sales. The FOMC decision will likely be the highlight of the day.