FX round-up: Dollar firms up as Powell testifies, Brexit concerns weigh on stirling
By Digital Look
Date: Tuesday 28 Nov 2017
(ShareCast News) - Tuesday saw the greenback firm up against a basket of currencies, as the dollar index managed to climb 0.27% to 93.152 by 1515 GMT as Fed chair designate Jerome Powell addressed the Senate Committee in Washington.
Current US Fed chair, Janet Yellen, is due to end her tenure in February with nominee Powell due to take over.
His testimony delivered at Capital Hill was an opportunity for senate members to question Powell regarding his view on banking, housing and urban affairs.
In his opening remarks, nominee Powell stated that he would strive to "support the economy's continued progress toward full recovery," and added " We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink."
"With Powell we expect more of the same as Yellen and we don't expect any major change in policy direction," said Elsa Lignos, global head of FX strategy at RBC Capital Markets.
Closer to home, UK banks were subjected to stress tests to determine whether there was any need to strengthen their capital positions.
According to the Bank of England (BoE), none of the seven high street banks tested were at risk failing should they incur losses of around £50 billion, with BoE Governor Mark Carney stating that the banks tested would endure, even in the "unlikely event" of a "disorderly Brexit."
Sterling suffered it's biggest one day fall against the dollar since 2 November, slipping 0.68% to 1.3228, after finding resistance at 1.3349 (50% retracement from 20 September high).
Brexit concerns were said to be the main driver for a weaker pound as Irish deputy PM, Frances Fitzgerald, resigned averting a government collapse and potential snap election that had threatened to complicate Brexit talks next month between Britain and the European Union (EU).
A deal regarding the Northern Ireland border has been a major point of contention for negotiations with the EU and has become even more so as the Irish government has been pushed to the brink of collapse.
"The EU has given the UK government a deadline of next Monday to come up with a plan on the Irish border, so that seems to be the main sticking point now," said Societe Generale FX strategist Alvin Tan.
If the deadlock between London, Dublin and Brussels is not solved soon, it could spell trouble for the pound, with Tan stating, "I wouldn't be surprised if we see cable testing the August low of $1.30 again and euro/sterling re-testing of the 93 level again."
A gloomy outlook from the OECD concerning the UK also added to sterling woes as they echoed the OBR's outlook last week stating that the growth slowdown is "expected to continue through 2018."
Stirling also tanked against the euro, trading 0.46% lower to 1.1141, finding solid support in that area as it did in early October and most recently on the 15 November.
The euro saw some lacklustre trading against the dollar as it was stuck in a 20 pip range for most of Tuesday's trading.
Falling 0.24% to 1.1870, the single currency found support in the 1.1867 area, where it continued to trade by 1625 GMT.
Over in Asia, the Japanese yen has continued to strengthen against it's US counterpart, with USD/JPY tradiung 0.19% lower to 111.31.
The yen has seen solid resistance in the 114.39 area on 10 May, 11 July and again for a number of days in late October/early November where, on all occasions, heavy selling was seen.
Giving a braoder view of yen moves, John Stopford at Investec Asset Management said, "at times of market stress, the yen tends to appreciate and overall positioning has become a bit stretched."
The Australian dollar was on the up against the greenback as it rallied 0.18% to 0.7616 after finding support in the 0.7600 area.
"We still contend that Aussie will drop through $0.7500 one side or other of year-end, driven primarily by a decisive move into negative territory for the likes of the 2-year AU-US swap rate differential," said Ray Attrill at NAB.
"It may take an increase in confidence that the spread is not coming back into Australia's favour anytime soon to see the Aussie lower," he added.
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