Dollar and stocks bide time ahead of busy next week

It has been a rather quiet week so far in the FX markets with the majors continuing to consolidate as investors try to make up their minds in terms of direction for the dollar. The greenback has been able to hold its own relatively well against the Canadian dollar but has fallen against all the other major currencies this week, with Japanese yen – the perceived safe haven currency – performing the best amid weakness in the stock markets, owing to concerns over a US-led potential trade war, among other things. The dollar has managed to come back against most currencies this morning, but it is far too early to make anything of it. Meanwhile shares on Wall Street closed down for the third consecutive day on Wednesday and the weakness has persisted with European indices giving up their earlier gains to turn red this morning. The UK’s FTSE 100 was still clinging onto a small gain when this report was written. It was finding mild support from weakness in the pound, which fell on headlines that Russia was going to retaliate and expel British diplomats. This comes in response to the UK’s decision to oust Russian diplomats after Moscow refused to explain how a nerve agent was used on a former spy and his daughter in the UK. Overall, the weakness in the global stock markets are mild and with the Nasdaq hitting a new record high earlier this week, investors aren’t in a full-blown panic mode…yet. The recent updates from the European Central Bank, the Bank of Japan and today the Swiss National Bank have all been somewhat more dovish than expected, while recent data in the US has been mixed, helping to push back expectations of aggressive rate hikes slightly. As a result, market participants have been unwilling to commit in one or the other direction for the dollar.

Not an awful lot left for this week

Investors, who have been waiting to see clear changes in economic conditions before committing themselves in a particular direction, may have to wait a little longer.  This week’s key event was those inflation numbers from the US and as it turned out they were bang in line with expectations and the dollar weakened slightly even if headline CPI rose to 2.2% year-over-year from 2.1% previously. The dollar’s losses accelerated yesterday on news retail sales contracted for the third consecutive month, this time falling 0.1% month-over-month in February, while core sales grew less than expected. So, while employment continues to top expectations, it looks like the other parts of the US economy are not doing as well and this may well be reflected in first quarter GDP growing less than expected. There is not an awful lot to look forward to for the remainder of this week. We will have the latest weekly unemployment claims and the Empire State and Philly Fed manufacturing indices today, ahead of a second-tier data dump on Friday, which will include the latest figures on building permits, housing starts, industrial production and UoM consumer sentiment index.

Lots to look forward to next week

Next week promises to be much better in terms of top-tier data releases. From the UK, we will have CPI, wages and retail sales data all to look forward to ahead of the Bank of England’s policy decision on Thursday lunchtime. Ahead of that, both the US Federal Reserve and the Reserve Bank of New Zealand will have made their policy decisions on Wednesday. The Fed is almost certain to raise interest rates another 25 basis points. However it will all be about the FOMC’s outlook for interest rates further into 2018 and beyond, which will be the main focal point for the markets. If recent data have helped to diminish policy makers’ urgency for higher interest rates then this could put further downward pressure on the dollar. However, if the Fed turns out to be more in favour of higher interest rates, perhaps because of expectations that high levels of employment may lead to higher wages and therefore higher inflation in the future, then this could be the trigger for a buck rally, and a possible sell-off for the majors. In addition to these central bank meetings, and UK data, we will also have important macro pointers from Australia in terms of jobs numbers on Thursday. Eurozone PMIs will also be published on Thursday, ahead of Canadian CPI on Friday. So, there’s a lot to look forward to next week, and hopefully, the markets will make up their minds in terms of direction.