Forex Market Review (European Session) – Dollar index hits one-month high ahead of Yellen’s speech; euro sinks to one-month low

Forex Market Review (European Session) -  Dollar index hits one-month high ahead of Yellen's speech; euro sinks to one-month low

The European forex markets on Tuesday continued digesting political uncertainties arising from the German elections, kicking the euro to a one-month low. The dollar, on the other hand, stood tall at a one-month high ahead of Fed Chair Janet Yellen’s speech later today despite US-North Korea war tensions becoming dangerous as fiscal policy came to the spotlight.

The dollar extended its uptrend against a basket of major currencies despite escalating North Korean tensions as focus turned to fiscal policy. Sources familiar with the topic said that Trump’s Republicans are due to suggest a new “pass-through” tax rate of 25% on Wednesday from the current 39.6%, while they are also considering asking for corporate income taxes to be cut from 35% to a target range of 18-23%.

Attention also shifted to the Fed Chair Janet Yellen’s speech expected later today at 1645GMT, where markets are eager to hear whether the Fed will stick to its plans to hike rates again in December after a number of FOMC members expressed reluctance on the inflation path.

Meanwhile in the Korean peninsula, a South Korean lawmaker supported that North Korea has reinforced its aircraft equipment on its east coast a day after the North’s Foreign Minister Ri Yong Ho considered Trump’s recent comments a declaration of war and argued that Pyongyang has the right to shoot down US warplanes even if they do not violate the regime’s airspace.

In terms of data, US August new home sales and September’s Conference Board (CB) consumer confidence indicator failed to provide a lift to the dollar. However, their negative impact was minimal.

Month-on-month new home sales declined by 3.4% in August compared to growth of 3.3% projected by analysts. The annualized number of new houses sold amounted to 560k, down from 588k expected and 580k (upwardly revised from 571k) seen in the previous month. Regarding consumer confidence measured by the CB index, it fell by 0.6 points to 119.8, slightly below the forecast of 120.0.

The dollar index hit a one-month high of 92.86. Dollar/yen surged to 112.14 while dollar/swissie jumped to 0.9717.

The safe-haven yellow metal retreated to $1,300.88 per ounce due to higher risk-on sentiment.

The euro was in the red during the session as hopes for more EU integration were fading after Chancellor Angela Merkel despite winning Sunday’s federal elections, lost some support and therefore must now negotiate a coalition with Eurosceptic parties. A process that might take longer. This came before French President Emmanuel Macron’s public appearance in Paris where he laid out his plans for overhauling Eurozone.

A speech by the ECB governing council member Jozef Makuch on Tuesday could not provide support to the euro as Makuch talked down the common currency saying that currency’s weakness weighs on inflation at times when Eurozone’s economy gains momentum. However, he added that “risks come from both sides” (economic improvement and strong currency) and hence the ECB should keep a close eye on them. Euro/dollar bottomed at a fresh one-month low of 1.1765, falling by 0.52% on the day.

A day after the fourth round of Brexit negotiations started, the pound dipped into losses against the strengthening dollar falling close to a two-week low of $1.3411. However, cable managed to pare some of its losses and bounced to $1.3422  following comments made by the European Council President Donald Tusk. Tusk after his meeting with the British Prime Minister, Theresa May on Tuesday, admitted that the British government has now a more realistic and constructive tone on Brexit. Nevertheless, he added that negotiations are still lacking progress for discussions to move to future trade relations with the EU.  Versus the euro, sterling hit a 10-week high driving euro/pound down to 0.8753 before it edged up to 0.8775.

The kiwi sank to a two-week low of $0.7191, down by 1% on the day, amid risks around New Zealand’s political environment, a few days before the RBNZ policymakers gather to decide on interest rates on Thursday. Its Australian cousin also dropped to a one-month low of $0.7881.

Dollar/loonie was mainly flat at 1.2373 ahead of the BOC Governor Stephen Poloz’s speech on Wednesday.

Oil prices retreated during the European session as investors were taking their profits. Previously, prices had recorded a strong rally amid higher compliance between OPEC and non-OPEC members to reduce output, while threats of cutting the oil exports of Iraq’s Kurdistan posed by Turkey’s President Tayyip Erdogan helped prices to reach fresh highs. WTI crude futures for November delivery declined to $51.91 per barrel but remained near to the 5-month high of $52.40 it touched in the Asian session. Brent futures were down at $58.57 after the contract peaked at a 26-month high of $59.45.

Source: Trade Forex with XM.

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