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USD retreats as geopolitical tensions rise.

By Joshua Hughes

The main release from the US yesterday came in the form of Unemployment Claims which unexpectedly fell from 282K to 259K. This is the second consecutive release that has come in well below forecast and helped build support for the USD following the Fed announcement on Wednesday. Unfortunately for the USD this shift in sentiment was short lived as the greenback retreated off the back of geopolitical uncertainty. Tensions are increasing between the US and North Korea as Kim Jong-Un warns the US and their “deranged” President that they will pay for Donald Trump’s most recent threats. Following this statement, we have seen Asian Stocks rise and the USD retreat as markets take a risk-off approach to investment. Today will see only minor releases from the US as markets will be motivated by sentiment and global events. As a risk-off market continues to grow we could see the USD continue to fall into the close of the week, despite the hawkish rhetoric we have heard from the Fed this week.

With only minor releases from the UK yesterday there was little to motivate investors towards the pound as we saw a slight reversal of the gains seen on Wednesday following the latest positive retail sales. The main focus today will be centred on Theresa May who is due to speak in Florence regarding plans for Brexit. Following a period of uncertainty which has caused negotiations to stall it will be key for the Prime Minister to put forward a plan that will act as a catalyst for future talks. There has been rumours that May will put forward a plan that will see the UK pay 20 million Euro’s over the next 2 years, however, it is doubtful that the PM will commit to any specifics today, including a monetary figure. The rhetoric used by May will be key here and although much of what is stated will be very ambiguous she will likely put a soft Brexit plan on the agenda and markets could react favourably to the pound. 

A quiet day in terms of data from the Eurozone as markets were focused on Mario Draghi's comments. Draghi, for the most part, steered clear of discussing the future of monetary policy however he did imply that tapering measures will remain in place for the time being. The Euro was able to take advantage of a weakening USD following the increase in geopolitical tensions. We will have a busy day from Europe today with a number of key PMI releases this morning. This will give markets a key indicator as to how the Eurozone economy is performing and may help give the Euro some support into the weekend. This morning we will also hear from ECB President Mario Draghi again, markets will be interested to hear the rhetoric used here and will be looking for any indication as to the future of monetary policy. The German election will also be playing on the minds of investors; it is highly unlikely that we will see anything other than a Merkel victory and markets will react favourably to this consistency.

Following the Fed announcement on Wednesday, we had seen a sharp sell-off from of the AUD during the early session yesterday which was not aided by RBA Governor Lowe who stated the central bank would not be raising rates for some time. With little data to digest from Australia, the markets were at the mercy of global sentiment which caused the AUD to continue to retreat. Overnight saw a drastic shift in the markets as North Korea issue their most recent threat to the US. Off the back of this news, markets took a risk-off approach to investment, causing the USD to retreat, Asian stocks to rally and fringe currencies to gain support. The AUD rebounded very quickly and was able to make up some of the losses seen yesterday. With little data to be released today, we could see the AUD continue to rally if a risk-off sentiment continues into the weekend.

No data released from New Zealand yesterday as markets turn to the parliamentary elections for guidance. We will likely see volatility today in the buildup to the results which will likely be released overnight. The latest election polls have indicated the National Party are ahead, however, this is forecast to be one of the tightest races in over a decade which will likely cause uncertainty today.