FX market outlook

FX market outlook

US dollar on back foot following Fed statement; aussie helped by trade numbers.

The US dollar was under some pressure during Thursday’s Asian session as the Fed statement from the previous day underwhelmed the market.

The dollar index sunk to a 2 ½ -month low following the Fed statement, which showed little urgency on behalf of the rate-setting committee to raise rates.  The Fed’s decision to hold rates was unanimous and a no-change verdict was widely expected by market participants.  The Fed was upbeat on US economic prospects regarding both growth and inflation.  Interestingly, the Fed said that the dampening effect of weaker oil prices on headline inflation ended, which would remove an important one-off factor that kept inflation lower.  Despite the Fed’s optimistic tone, there was little to suggest an imminent rate hike – say in the March meeting – which was a disappointment for dollar bulls.  According to some analysts, the Fed could also be taking a wait-and-see approach with respect to the economic policies of the new administration – particularly on fiscal matters.

In the meantime the latest news out of the Trump administration also did not encourage dollar buying as tensions rose between US and Iran and as details of a phone call between Trump and Australian Prime Minister Turnbull showed that the US President could take a hard line even versus some of America’s best long-term allies.

Dollar / yen traded as low as 112.48 before rebounding to 112.82, while euro / dollar was once again testing the key psychological 1.08 level and trying to overcome it.  Sterling was also doing well against the broadly weaker dollar, as pound / dollar traded just below the 1.27 mark at 1.2675.  Sterling was helped by the passage of a bill through the UK parliament that allowed the government to make further progress towards getting authorization for triggering Article 50 to leave the European Union.

In the day’s economic data, positive Australian trade data for the month of December were released. The figures showed a trade surplus that far exceeded expectations as the resource-rich nation greatly benefitted from rising commodity prices.  Specifically, the trade surplus number was the largest on record and stood at A$3.51 billion against the forecasted A$2.2 billion, marking an impressive 72% increase from November’s upwardly revised number.  The aussie surged 0.7% upon release of the data versus the greenback with aussie / dollar pair reaching an intraday high of 0.7651; its highest since the US elections.  The pair was last at 0.7644.

Looking ahead to the remainder of the day, the main event to watch will be in the UK, as the Bank of England meets, issues its quarterly inflation report and its Governor, Mark Carney, hosts a press conference.  The UK government is also expected to issue a policy paper on its Brexit strategy, while construction PMI for January is also going to be released.  ECB President Mario Draghi will also speak near the time of Carney’s press conference.  Out of the United States, weekly jobless claims and productivity and labor costs for the fourth quarter will also be monitored by market participants.