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FX round-up: Dollar on backfoot as Fed rate hike expectations pared back

By Alexander Bueso

Date: Wednesday 17 May 2017

FX round-up: Dollar on backfoot as Fed rate hike expectations pared back

(ShareCast News) - Allegations that US president Donald Trump tried to influence an investigation into his former national security adviser sent the US dollar to its lowest level since early November as expectations for a June interest rate hike from the US central bank were declined.
As of 18:18 BST the spot US dollar index was off by 0.48% at 97.64 and the market-implied odds of a 25 basis point rate hike at the Federal Reserve's June meeting down to 64%, versus 80% one week before.

Overnight, The New York Times reported that US president Donald Trump tried to influence decisions by Federal Bureau of Investigation chief James Comey regarding his investigation into former national security adviser Michael Flynn.

On a cautionary note, Chris Beauchamp, chief market analyst at IG said: "please remain calm, the Dow is down by more than 1%. [...] It says a lot for how quiet markets have been that today's selloff, which has been rather dramatic relative to the recent past, is being trumpeted in some quarters as the beginning of the next big pullback."

Against that backdrop, euro/dollar was up by 0.54% to 1.1141 despite protestations from some technical analysts that it was due for a 'pull-back'.

Nevertheless, worst hit were the yen crosses, as risk aversion reared its head. Sterling lost 1.51% to 143.92 against the Japanese currency, while the US dollar lost 1.71% to 111.94 yen.

Strength in the yen came despite data showing that Japanese 'core' machinery orders, which exclude those for ships and from utilities, grew by just 1.4% on the month in March (consensus: 2.5%).

In parallel, Japan's Ministry of Economics reported that industrial production fell by 1.9% month-on-month in March.

The Aussie meanwhile was unchanged against the US dollar at 0.7429 as ratings agency Standard&Poor's reaffirmed its AAA long-term rating on the country's debt, albeit with a 'negative' outlook.

Trump's political woes added to market pessimism about the prospects for aggressive fiscal stimulus in the US, highlighting the "deep divides" with the US Republican party, said Jane Foley and Piotr Matys at Rabobank.

According to the two FX strategists, that had contributed to the recent drop in the US dollar, but positive political news out of France and Germany had also played a role.

Nonetheless, they were squeamish about raising their year-end 1.10 forecast for the euro/dollar or their 1.12 12-month projection for the pair.

"The approaching Italian election suggests that the EUR reprieve from political apprehensions could be short-lived. Meanwhile there is a strong likelihood that the debate regarding a reduction in the Fed's balance sheet will receive an airing in the coming months. Any reduction in the balance sheet should be a bullish USD factor," they said.

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