Notwithstanding President Trump’s daily twitter condemnations (trade partners and the Federal Reserve drew his ire this morning), traders have started to look ahead to next week’s trade. The marquee economic events impacting next week’s FX market will likely be Australia’s Q2 CPI reading in Wednesday’s Asian session and Thursday’s ECB meeting.
The U.S. dollar was on course to end sharply higher yesterday until Donald Trump spoke. While the greenback has steadied and could still push higher, market participants are now in no doubt what the President thinks of the currency’s growing value and rising interest rates in the United States. But can he actually do anything to stop them rising?
Earlier I wrote on the U.S. dollar/Japanese yen (USD/JPY) currency pair, highlighting a potential breakout in that pair above a long-term bearish trend line. In fact, weakness in the yen is a dominant theme as the ongoing stock market rally continues to undermine the appeal of the safe haven currency. One interesting yen pair to watch this week could actually be the Canadian dollar/Japanese yen (CAD/JPY), due to the Bank of Canada’s rate decision tomorrow.
To say this week has been a poor one for the British pound is an understatement. The downbeat currency – already reeling from ongoing Brexit and political uncertainties – has been hit further by disappointing domestic economic data. Investors have been left wondering whether the soft data may have any implications on the Bank of England’s decision to hike interest rates next month. Although a 25 basis point rate rise is still likely, the probability of a no change has risen thanks to the disappointing wages, inflation and now retail sales figures.
The British pound/U.S. dollar (GBP/USD) currency pair broke down earlier on the back of a slightly disappointing UK wages data and after reports emerged that Prime Minister Theresa May could lose an important parliamentary vote on Brexit. Apparently, Labour will support a move from pro-European Tory MPs to keep the UK in a customs union with the EU if no trade deal is reached by January.
The dollar started the new week lower, supporting the major currency pairs such as the euro/U.S. dollar (EUR/USD) currency pair and poubd//U.S. dollar (GBP/USD) currency pair this morning. There wasn’t any fresh news out to impact the greenback, so its weakness can be attributed in part to profit-taking.
If you were just to look at the where the major currencies are trading relative to yesterday’s US close, you’d think it’s been a pretty quiet day; after all, none of the majors are trading more than 0.3% from the day’s open as of writing. However, that apparent tranquility is masking some big moves (and subsequent reversals) over the last 20 hours.
The biggest themes in the markets this week can be summarized as: U.S. dollar strength; weakness in foreign currencies – particularly where the central bank is still dovish such as the Japanese yen and Swiss franc; and positive sentiment in the markets.
As we noted in our Bank of Canada Preview report, today’s BOC meeting was never really about if the central bank would raise interest rates (even after last night’s escalation in the global trade war); instead, traders were focused on BOC policymakers’ outlook for future economic growth and what that would mean for interest rates moving forward.