FX Wrap: DXY soggy, EUR continues to rise on solid fundamentals

DXY: The Dollar Index is red for the fourth consecutive day, and on course to print its third straight week of losses. The weakness seems to have been driven by strength in the EUR on the back of this week’s solid PMI surveys, which showed upside surprises. Next week, the focus will be back on tax reform, with lawmakers returning from the Thanksgiving Recess. The Senate Floor is expected to vote on its version of the tax reform bill, which may set the tone for the buck into year-end. Additionally, next week, the incoming FOMC Chair Jerome Powell will have his confirmation hearing, and analysts will be listening out for clues on whether Powell will endorse the current monetary policy stance, or whether he will be open to a re-assessment of the Fed’s policy framework, with options including a price-level target (as alluded to in the Fed’s latest meeting minutes).

EUR: The EUR is on course to finish the day in the green for a fourth consecutive session, which would also lock in four consecutive weekly gains. After falling to around 1.1725 vs. the USD earlier in the week on the back of uncertainties relating to the forming of a government in Germany, the single-currency has staged a recovery, punching through the 1.19 handle in Friday trade. There wasn’t any specific catalyst driving the EUR higher in afternoon trade, though some traders were citing technical factors, as well as the IFO survey out of Germany earlier in the session, which provides further survey evidence of the Eurozone’s fundamental recovery.

GBP: Sterling has weakened for four straight days against the EUR, though, at the time of writing is on course to end the week slightly higher against both the EUR and USD. GBP seems happy to look through data, and was unshaken by the latest consumer confidence release, which showed that sentiment had deteriorated to the lowest levels since the Brexit referendum. The fate of the pound is clearly linked to the progress (or lack of) being made in Brexit negotiations. This week, the flow of news suggests that the UK is preparing to up its offer of financial settlement with the EU in order to progress negotiations onto trade; however, there are some suggestions that the UK’s offer, reported to be around GBP 40bln, may be on the low-end of what the EU wants.

JPY: The yen dropped against the EUR after a decent IFO survey added to ‘recovery in Eurozone fundamentals’ narrative, and follows on from the impressive PMI data released on Thursday. EURJPY jumped to the highest in the week, though hasn’t managed to fully recoup last week’s losses. Meanwhile, against the USD, JPY has been more subdued over the last couple of days (also shrugging-off the surge in Chinese yields). USDJPY’s range since Q2 2017 has roughly been between 109 to 114.50, and as we head into the close of business for the week, the Japanese currency is lurking around 111.50, around the mid-point of that range. Technical traders are keeping an eye on the 200 DMA at 111.70. Meanwhile, analysts have argued that real-yield differentials will need to widen in order to help the pair move back towards the top of that range; but with the market sceptical over the prospects for US inflation, and only pricing in two hikes next year (versus the Fed’s forecast for three hikes), it will need either a repricing of Fed rate hike expectations and/or a smooth tax reform process enacted quickly to help facilitate such a move.

COMMODITY FX (CAD, AUD, NZD): The complex was broadly unchanged on Friday, despite the slide in oil prices, and copper rising above $7,000 per tonne (on supply drawing down, as well as USD weakness). Next week’s OPEC meeting will be a key driver for commodity FX, and the cartel, along with some non-cartel participants, are expected to extend the supply cut agreement for an additional nine-months. More idiosyncratically, next week’s speech from BOC Governor Poloz at the release of the Financial System Report will be crucial going into the December BOC meeting (as will the report be); with the BOC expected to stand pat at that meeting, traders will be keeping an eye out for clues about what the central bank intends to do in the new year.

24 Nov 2017 - 16:00- Forex- Source: Newswires

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