Daily FX 28.01.22: Position Adjustment Important For Pound Vs Euro, Dollar Outlook - Exchange Rates UK

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Dollar to Remain Dominant in Global Markets, Position Adjustment Important into the Weekend

Traders will be looking to jump on the dollar bandwagon after strong gains on Thursday with expectations of further momentum buying as the Fed signals a sustained tightening cycle.

There will be some pressure for a correction into the weekend, but there is also scope for Euro selling given unease over the situation in Ukraine, limiting the scope for any single-currency recovery.

Overall, trends in risk appetite and moves in global equity markets will also be a key element for global currency markets with further volatile trading across all asset classes.

Pound US Dollar Exchange Rate Outlook

bannerThere was a lull in intense UK political speculation during Thursday with trends in risk appetite and the dollar tending to dominate moves in the Pound to Dollar (GBP/USD) exchange rate.

GBP/USD dipped to 2-month lows around 1.3360 as the dollar posted strong gains before a tentative recovery to just above 1.3400.

Risk trends will remain extremely important during Friday with further choppy trading across equity markets and GBP/USD dipped back below 1.3400 as equities dipped again.

Political developments are likely to remain in limbo unless there is an unexpected release of the Gray Downing Street report on Friday.

Euro (EUR) Exchange Rates Today

The Euro to Dollar (EUR/USD) exchange rate posted further sharp losses on Thursday with the pair dipping to fresh 20-month lows around 1.1130 before a marginal recovery.

Overall yield spreads undermined the Euro with expectations of a dovish ECB policy stance.

The Euro could gain an element of relief during Friday, but underlying sentiment will remain negative.

According to Danske Bank the fundamentals remain supportive for the dollar with the Euro still overvalued while investment inflows will be weak. It adds; "Incoming data (this week, e.g. hawkish Fed and IMF downgrading global growth outlook) keep suggesting a lower EUR/USD. We remain of the view that EUR/USD spot will be headed even lower over the coming quarters and target 1.08 in 12M.

US Dollar (USD) Exchange Rates Outlook

The dollar posted strong gains on Thursday with further net support from the hawkish comments from Fed Chair Powell which boosted expectations of more aggressive tightening.

The US currency also drew important support from month-end positioning during the day with the combination leading to strong US currency gains and the trade-weighted index posted a 19-month high.

The dollar will gain further support from yield expectations and a lack of support for both the Euro and yen with the Dollar to Yen (USD/JPY) exchange rate strengthening to 115.65 at Friday's European open.

Over the next few weeks, one potential fly in the ointment for the dollar will be further selling in the US technology sector.

Other Currencies

Global risk conditions dipped again following the Fed press conference while the US dollar posted net gains against all major currencies.

The New Zealand dollar continued to lose ground despite expectations of Reserve Bank of New Zealand rate hikes. The Pound to New Zealand dollar (GBP/NZD) exchange rate posted fresh 20-month highs near 2.0400 before correcting slightly.

The Pound to Australian Dollar (GBP/AUD) exchange rate also hit 5-month highs just below 1.9100.

Low yields undermined the yen with the Pound to Yen (GBP/JPY) exchange rate at 1-week highs near 155.00.

The Day Ahead

The latest US PCE prices data will be released on Friday with expectations that the core rate will increase to 4.8% from 4.7% which would be the highest rate since 1983.

Strong data would maintain expectations of aggressive Federal Reserve tightening, although market sentiment has already shifted.

The Euro-zone business confidence data is likely to be resilient.

Overall, the Wall Street performance is likely to be the most important element for currency markets with further choppy moves in indices inevitable.

There will also be position adjustment ahead of the weekend with markets also monitoring the Ukraine situation closely.

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