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Stock markets are more upbeat and the dollar is finding its feet as investor sentiment recovers from concerns that president Donald Trump’s protectionist measures will overshadow his plans for boosting the economy.

The relatively chipper tone is reducing demand for supposed havens like gold, Treasuries and the Japanese yen.

What to watch
Major central banks are in the spotlight, with the Federal Reserve delivering its policy decision later on Wednesday (here’s our guide to what to watch), and the Bank of England following suit on Thursday.

Both are expected to keep monetary settings on hold, just as the Bank of Japan did on Tuesday, so it is their accompanying commentary that will be scanned for clues to policy trajectory.

Analysts at TD Securities in a note to clients said the market is forecasting no move by the Fed. But they added: “A hawkish surprise in the language should increase the markets’ pricing of more than 2 hikes this year, in our view. We think this dynamic should strengthen the US dollar.”

Fed fund futures currently suggest a 49 per cent chance that the US central bank will raise interest rates by 25 basis points at its March meeting, according to Bloomberg calculations.

The probability of the BoE increasing borrowing costs does not rise above 50/50 until February 2018.

Hot topic

The dollar is the main focus in the forex markets having wobbled in recent sessions after Peter Navarro, president Donald Trump’s trade adviser, reinforced the administration’s claims that the US was the victim of other countries’ currency manipulations.

Also weighing on the greenback were figures on US employment costs, home prices, manufacturing activity and consumer confidence released on Tuesday that suggested the country might be stuck in a shallow growth trajectory.

Citi strategist Steven Englander said the weak greenback on Tuesday was “largely due to a fear among investors that the fiscal and tax reform will be side-lined by political distractions and that activist country and currency trade policy will be the substitute policy, however ineffective.”

Still, the buck is finding favour again on Wednesday. The dollar index, which hit a 14-year high of 103.82 when the “Trumpflation trade” was at its height at the start of the year, and which dropped to an 11-week intraday trough of 99.43 on Tuesday, is recovering 0.3 per cent to 99.76.

The euro, which rose 1 per cent on Tuesday after Mr Navarro said it was “grossly undervalued”, is down 0.1 per cent to $1.0783, and sterling is retreating 0.1 per cent to $1.2565. The Japanese yen, which also strengthened in the previous session, is relapsing by 0.6 per cent to ¥113.49 per dollar.

Equities
The tone across stock markets is more upbeat after Tuesday’s dip. The pan-European Stoxx 600, which has fallen 2 per cent in the past three sessions, is recovering 0.9 per cent as banks gain ground.

Bourses are being buoyed by Wall Street’s sharp and late paring of Tuesday’s initial losses, and futures indicate the S&P 500 will add 4 points to 2,283 when trading gets under way later in New York.

The yen’s retreat helped the exporter-sensitive Japanese stock market move higher, with the Topix index up 0.4 per cent. Hong Kong’s Hang Seng index returned from the lunar new year long weekend, and played catch-up by falling 0.5 per cent. Markets in mainland China remained shut for the holidays.

Commodities
Gold is down 0.2 per cent to $1,209 an ounce.

Brent crude, the international oil marker, is barely changed at $55.58 a barrel while West Texas Intermediate, the US contract, is up 0.1 per cent to $52.84 ahead of inventory data due later in the day.

Trading volume is thin in base metals because of China’s absence, but the sector is mostly firmer as investors welcome continued expansion in the Chinese manufacturing base.

Copyright The Financial Times Limited 2017. All rights reserved.
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