• A stronger dollar plunges corporate earnings
  • Market is betting the Fed will be patient
  • The pound finds some support from the BOE
  • A bearish sentiment pervades over the Aussie dollar

The stock market performance is generally considered a reliable barometer of where the economy will be in six months.  If this is the case then yesterday’s plunge in stock prices is unsettling.  The Dow Jones industrial average fell by over 200 points (or 1 percent) as a succession of poor quarterly earnings reports disappointed investors.

Microsoft, Caterpillar, Procter & Gamble and other leading companies posted disappointing financial results and, at one point, drove down the Dow by more than 350 points.  The companies cited a stronger dollar as one of the most cited offenders for their underperformance and cautioned investors that their future overseas earnings, which make up on average about 50 percent of total, will be lower due to the stronger dollar.

 jan-28 graph

As mentioned in yesterday’s update, the release of the Federal Open Market Committee (FOMC) statement this afternoon will be heavily scrutinized for any sign of the Fed deciding to exercise “patience.” They could hold off on the timing of the interest rate increase this year to restrain the dollar from materially damaging the economy.

Underscoring this case, yesterday’s Durable Orders Goods report showed that orders for durable and investment goods unexpectedly fell 3.4 percent in December from a month earlier.  Additionally, US bond and gold prices rose, suggesting that the market is betting on lower interest rates to prevail for a longer period than what the Fed has been projecting.

If the market is correct, the dollar could weaken more this afternoon.  Stay tuned.

EUR-USD made highs of the week yesterday afternoon, rallying to 1.1420, as US stocks plunged and market chatter about the Fed postponing the rate hike grew louder.

GBP-USD has recovered from a disappointing Gross Domestic Product report released yesterday, which showed that growth has decelerated in the final quarter of 2014.  The pair is advancing above 1.5175, supported by recent signals from the Bank of England that a fresh stimulus package is not on the cards despite the recent sharp drop in inflation.

USD-CAD failed to climb above 1.2500 yesterday as profit-taking trades pushed the pair down to 1.2400. The background sentiment remains horribly bearish as oil prices continue to languish.

AUD-USD has rebounded from the 4-year low at 0.7858 yesterday and has found some support overnight.   The pair is forecast to trade within a 0.80-0.7800 range until next week’s Reserve Bank of Australia policy decision.

Have a great day!