Increased Odds of March Fed Rate Hike Fail to Shore up US Dollar

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Headlines

  • Contraction in Building Approvals Dented AUD Exchange Rates – Weak producer price index may extend downtrend further
  • Hawkish Fed Outlook Failed to Keep US Dollar on Stronger Footing – Volatility forecast on jobs data
  • Sterling Shrugged Off Dip in UK Manufacturing PMI – Investors encouraged by strong export growth
  • Eurozone Manufacturing Continued to Power Ahead in January – Euro benefits from run of bullish domestic data

Australian Dollar

A rather mixed raft of Australian data left AUD exchange rates lacking in any particular support on Thursday. While January’s manufacturing PMI demonstrated continued growth on the month, rising to an encouraging 58.7, this was balanced with a surprise contraction in building approvals for December. All in all, investors saw little significant cause for confidence in the Australian economy, particularly with the Federal Reserve looking likely to raise interest rates again in March.

If the fourth quarter Australian producer price index points towards increased inflationary pressure, however, the mood towards the Australian Dollar could pick up today.

Sterling

Although the UK manufacturing PMI for January disappointed forecast, dipping from 56.2 to 55.3, GBP exchange rates held onto a positive footing. Investors were encouraged to find that export orders had risen sharply on the month, offsetting some of the negative impact of Sterling softness and weakening domestic confidence. With signs indicating a further build-up in inflationary pressure the odds of an imminent Bank of England (BoE) interest rate hike remain elevated.

Even so, another weaker showing from the construction PMI may see Sterling returning to a downtrend.

Euro

The finalised Eurozone manufacturing PMI confirmed that the currency union maintained much of its momentum at the start of 2018. Greece, Italy and the Netherlands all demonstrated sharp improvement on the month, indicating that stronger economic health is not just confined to members such as Germany. With the outlook of the Eurozone economy as a whole looking encouraging hopes of the European Central Bank (ECB) returning to a monetary tightening bias naturally picked up further.

With forecasts pointing towards an easing in December’s producer price index, though, EUR exchange rates may struggle to hold onto their gains ahead of the weekend.

US Dollar

While Federal Reserve policymakers proved rather upbeat in tone yesterday this failed to shore up the US Dollar for long. Even as markets moved to price in higher odds of a March interest rate hike USD exchange rates came under renewed pressure. An unexpected contraction in non-farm productivity dented the appeal of the US Dollar, suggesting that the US economy is not in as strong a state as previously thought.

Tonight’s jobs data may offer USD exchange rates a more substantial rallying point, providing that the labour market continues to tighten and wage growth picks up.

Canadian Dollar

January’s Canadian manufacturing PMI showed another month of solid sector expansion, boosting confidence in the domestic outlook. CAD exchange rates also benefitted from a moderate recovery in oil prices, even though the market remains distinctly fragile at this juncture. However, with the Fed looking set to tighten monetary policy further the Canadian Dollar struggled to properly capitalise on these positive developments.

Any downward shift in market risk appetite could prompt a fresh downtrend for CAD in the near term.

New Zealand Dollar

While the prospect of another imminent Federal Reserve interest rate weighed on market risk appetite NZD exchange rates still largely held their ground yesterday. Despite a continued lack of domestic data the New Zealand Dollar was able to capitalise on the relative weakness of the rivals such as the US Dollar and Australian Dollar.

However, an uptick in New Zealand building permits or the ANZ consumer confidence index may be enough to send NZD exchange rates on a bullish run today.

Data Released

February 2nd 07:45 NZD Building Permits (MoM) (DEC)
February 2nd 10:30 AUD Producer Price Index (YoY) (4Q)
February 2nd 19:30 GBP Construction PMI (JAN) 52
February 2nd 20:00 EUR Eurozone Producer Price Index (YoY) (DEC) 2.3%
February 2nd 23:30 USD Change in Non-Farm Payrolls (JAN) 180,000

Post by TorFX

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