FX market outlook

FX market outlook

Dollar rises on Fed rate hike expectations despite lack of details on Trump policies.

The main focus of the markets was US President Donald Trump’s testimony in front of Congress. Trump’s speech was optimistic about the US economy and markets welcomed his pro-growth agenda. But nothing new was said and there was a lack of clarification on infrastructure spending, tax and regulatory relief, aside from asking Congress to set aside $1 trillion for infrastructure spending.

The dollar initially fell as Trump spoke, as investors were disappointed there were no details on policies. Dollar / yen dipped to an Asian session low of 112.76 but soon recovered to bounce above the key 113-yen level as attention shifted to the probability of a Fed rate hike at the March 15 FOMC meeting. Gold is down for a third straight day due to the broadly stronger dollar. The precious metal moved further away from Monday’s 3-month high of $1263.74 and slipped towards the key $1245 level.

Two Fed officials speaking yesterday indicated they were in favour of a March rate hike. Speaking during an interview on CNN yesterday, New York Fed President William Dudley, who is usually dovish, said the case for tightening now is a lot more compelling.

Dudley’s comments followed those from San Francisco Fed President John Williams who was also supportive of a rate increase at the next FOMC meeting. Focus will now turn to Fed Chair Janet Yellen’s speech on Friday, when investors will look for more clues on the US central bank’s rate hike path.

In other news today, GDP data out of Australia showed the economy averted a technical recession. Fourth quarter GDP rose 1.1% quarter-on-quarter versus expectations of 0.8% and was an improvement from the previous quarter’s -0.5%. The aussie jumped against the greenback in reaction to the solid data and hit a session high of 0.7698. The Australian dollar was also supported by upbeat Chinese manufacturing PMI which rose to 51.6 versus the expected 51.2.

Looking a today’s economic calendar, PMI data out of the Eurozone, the UK and the US will be eyed. Other key reports out of the US include personal spending and personal income figures.