Dollar Surge Continues as Spotlight Moves to Potential March Hike

2017-03-02 14:00:00

Talking Points:

- USD-strength has continued the top-side move that started on Thursday, as comments from San Francisco Fed President, John Williams, helped to stoke U.S. rate expectations-higher.

- This was followed by a well-received Joint Address to the Union by President Trump, and some hawkish commentary from noted Fed-dove, Lael Brainard. This has further driven rate expectations for the Fed’s next meeting in March (two weeks away).

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The Federal Reserve was persistently hawkish through the first half of February, but this did little to bring back the prior strength that had driven the Greenback-higher in a historic move after the U.S. Elections.

Two weeks ago, at the Fed’s twice-annual Humphrey-Hawkins testimony, Fed Chair Janet Yellen opened her remarks by saying that she felt the bank should hike rates ‘sooner rather than later,’ and this drove the Greenback up to a key resistance level at 101.53. This is the 50% marker of the January move-lower, and if the U.S. Dollar was able to pose a sustained-break above this level, the prospect of top-side continuation would appear considerably more attractive. But that was not to be, at least two weeks ago, as the second day of that testimony elicited a reversal that brought back bearish price action to the Dollar.

Then last week, the release of the Fed meeting minutes from the prior rate decision at the end of January/early February were released and, once again, inspired a quick bout of USD-strength. But, just as we saw in the week prior, sellers came-in at this key resistance level of 101.53, and the U.S. Dollar failed to move-back into that bullish-trend state that had dominated FX markets to close 2016.

But this Wednesday was far different…

The headlines are likely associating much of this recent move in the Dollar with President Trump, as has become fairly standard media protocol. But if we look beneath the surface, there are some contributing factors that are getting traders to hastily-increase probabilities for a rate hike in March, and that’s been a consistent chorus of hawkish Fed-Speak. Just hours before President Trump delivered his Joint Address to the Union, San Francisco Fed President John Williams gave some very hawkish comments to markets; and for a centrist as Mr. Williams is often considered to be – this showed that the Fed might be closer to that next rate hike than many were previously expecting. This likely carried considerable weight and, as we looked at yesterday, the Dollar’s bullish move actually began well-ahead of the Joint Address to the Union, right as Mr. William’s comments were filtering into markets.

And then yesterday – another surprise happened when noted dove Lael Brainard indicated that she was warming up to the idea of a hike in March. Ms. Brainard has been extremely careful in her comments regarding rate hikes in the past, and often errs on the side of caution. But yesterday, she indicated that she feels rates are ready to rise ‘soon’ and this has only further contributed to the idea that the bank might be looking at a hike in March.

The net-impact of this move was the U.S. Dollar finally putting in a daily close above the key resistance level of 101.53, giving the appearance that USD-strength is on the return. On the chart below, we look at the 4-hour chart of this recent top-side breakout.

Chart prepared by James Stanley

USD/JPY Showing Increased Rate Hike Odds Fairly Prominently

One of the favored USD-strength setups that we’ve been discussing for the better part of the past few months is in USD/JPY. Given the veracity of the incline during the ‘Trump Bump’ taking place after the election; and then also given the more-shallow retracement that was seen during January, and USD/JPY remained an attractive venue to watch for the return of USD-strength.

But being an attractive venue doesn’t directly illicit bulls into the market. It merely provides enough motivation for support to hold, and this was very much what we saw throughout February, as buyers held up price action at a key zone from 111.61-112.40. This kept USD/JPY in a spot where, once bullish drivers returned to the fray price action could move-higher; and that’s precisely what happened on Wednesday of this week, where the pair had previously tested the bottom of that support zone at 111.61. But as Mr. Williams comments came into markets and then, later, President Trump’s speech drove confidence-higher; and strength began to show again in USD/JPY.

At this point, we’re now running up wedge/trend-line resistance after a fairly quick ramp-higher in the pair. For those that aren’t yet long, awaiting a top-side break of the 114.50 level could show that bulls might be able to extend the move; at which point looking for a ‘higher low’ point of support could open the door to bullish trend-continuation strategies.

Chart prepared by James Stanley

If USD/JPY does face near-term resistance:

For traders that don’t want to first wait for the move to expand before plotting potential support or entry points, near-term price action could be utilized in the event that this trend-line of resistance holds. Below, we look at the shorter-term move in the effort of finding potential support levels should this near-term form of resistance hold. Given how aggressively prices have ramped-up on this most recent top-side run, traders would likely want to discount those swings or the potential for those swings to show back up for support. Instead, prior price action can provide a couple of different zones of interest in the event that buyers are unable to continue this top-side push in the near-term.