FX market outlook

FX market outlook

US dollar extends losses after Trump inauguration.

The US dollar extended its decline from Friday, as the market continued to lighten up on long dollar positions after Trump’s inauguration speech.  According to analysts, Trump’s speech was nationalistic and protectionist in tone as it stressed the need to produce goods in the United States and to hire US workers.  The Trump administration looks more likely to follow a unilateral approach on economic and trade policy.  There was less in the speech about upcoming fiscal stimulus; a theme which the market has used to drive up the value of both US stocks and the dollar since the election.

The dollar declined broadly against all other majors.  The biggest winners were the Japanese yen and the British pound, with dollar / yen and pound / dollar at 113.36 and 1.2457 respectively.  Euro / dollar managed to rise to a six-week high of 1.0750, although the euro’s gains were less pronounced compared to the yen and the pound.  The dollar index fell to a 1 ½ month low of 100.21 – more than 3.5% away from its early 2017 high of 103.82.  Technical analysts were already eyeing a return of the dollar index below the psychological 100 mark.

As the forex market has been concentrating more on US political developments, this volatility in the dollar could continue in the months ahead until more clarity emerges as concerns the new administration’s economic and trade policy.  One should not expect a quick resolution of this uncertainty however, as policy intentions do not always neatly translate into policy actions.  This could be especially true given the wafer-thin majority that the Republicans enjoy in the US senate, which could create problems for the passage of legislation that is deemed controversial – especially for measures that could increase the budget deficit.

The Australian dollar didn’t manage to capitalize as much on the weak greenback as it rose to only 0.7568.  The aussie had been the best performing major currency of the year so far and in addition, a slightly risk-off mood also hurt its chances of rallying even more.

In China the central bank decided to offer additional temporary liquidity ahead of the year-end at the end of this week.

The remainder of the day is likely to quiet in terms of economic events.  ECB President Mario Draghi will speak at an event in Italy, while the ECB Chief Economist Peter Praet will also speak later in the day in Brussels.  There is nothing in the way of major economic data releases today.