USD in Yellen's Good Graces - Rate Hike in 2015 Still Eyed
- Fed Chair Yellen outlines plan to raise rates in 2015.
- See the September forex seasonality report.
A quiet end to a quiet week on the economic calendar has left markets sensitive to commentary from central bank officials, and price action overnight didn't disappoint in that regard. With Federal Reserve Chair Janet Yellen outlining the case for a rate hike this year in a speech last night, both risk assets and the US Dollar have found support anew.
The most interesting price action has been in US equity market futures, where (at the time of writing) the Dow Jones was up over +200-points pre-market and the S&P500 had gained nearly +1.50% itself. It's unusual to see risk assets rally on the back of what was relatively hawkish monetary policy commentary from Fed Chair Yellen; generally speaking, risk assets benefit when monetary policy becomes looser.
However, given the context of recent market moves, the price developments we've seen overnight actually make perfect sense when we think back a week:
- Global equity markets, including those in the United States, have been undergoing a spell of volatility on the back of concerns over global growth and Chinese financial concerns.
- The FOMC had held rates in part due to the aforementioned issues, thereby validating market participants' collective belief that there was a reason to be concerned.
- Fed Chair Yellen indicates that a rate hike in 2015 is still the base case, suggesting that the FOMC's concerns over global growth and Chinese financial issues are short-term in nature.
- Global equity markets are turning higher as a result of traders interpreting Fed Chair Yellen's commentary as a reason to be more optimistic on growth prospects, something the Fed was quite dour on just last week.
The key pair to watch among all this reshuffling is USDJPY. As we outlined earlier this week, USDJPY price action has set itself apart from other USD-pairs. With the S&P500 rebounding so sharply overnight, USDJPY finds itself pressing the topside of its recent triangular consolidation. Ultimately, a break through ¥121.00 and ¥121.73 will be necessary before we can more confidently say a near-term bottom has been established.
--- Written by Christopher Vecchio, Currency Strategist
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