FX market outlook

FX market outlook

Dollar retreats after FOMC minutes; aussie dips on weak China PMI.

The US dollar extended losses during the Asian session today and remained under pressure after a big drop following Wednesday’s release of the FOMC minutes. Sentiment is broadly risk off in the markets today as investors turn their focus to a two-day meeting between US President Donald Trump and Chinese President Xi Jinping that begins today. Meanwhile, Friday’s US jobs report is also a big risk event that would keep investors cautious.

The minutes of the Federal Reserve meeting that took place on March 14 – 15, indicated that the US central bank wants to start reducing the size of its balance sheet. The markets reacted negatively and assumed that the Fed would slow down its rate hikes while it unwinds its holdings of $4.5 trillion in bonds.  The minutes also revealed that fiscal policy might not come into effect until next year.

The greenback softened after the minutes as markets re-evaluated whether the Fed would still hike rates two more times this year, as they see that modifying the balance sheet could reduce the need for higher interest rates.

The dollar index posted a low of 100.38 on the day so far. Yesterday the index posted a three-week high of 100.85.

Against the yen, the dollar reversed gains it made yesterday following a robust ADP jobs report.

After having traded above 111.40 yen yesterday, the greenback fell after the FOMC minutes to reach 110.28 in the Asian session today.

The euro overall has been little changed all week against the dollar and has been hovering around $1.0660. The single currency recovered from yesterday’s dip to $1.0634. All eyes will be on ECB President Mario Draghi who is due to speak at a conference being held in Frankfurt later today. The euro could weaken if Draghi is more dovish than expected.

The Australian dollar fell due to general risk aversion in the markets. Disappointing Chinese PMI data also had a negative impact on the aussie, which slid against the greenback to reach a four-week low of $0.7531. The Caixin services PMI for March came in at a six-month low of 52.2, down from February’s 52.6.

Looking at economic events for the rest of the day, the ECB monetary policy meeting accounts are due to be released, while jobless claims out of the US will also attract attention. ECB President Mario Draghi’s speech will be eyed later, but the main event will probably be the Summit between Presidents Trump and Xi.