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Pound May Turn Volatile on FSR Release, US Dollar Eyeing Yellen

Pound May Turn Volatile on FSR Release, US Dollar Eyeing Yellen

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • British Pound may become volatile as the BOE unveils FSR update
  • US Dollar looking to FOMC Chair to step up hawkish sales pitch
  • Aussie, NZ Dollars rise as US bond yields fall before Yellen speech

The release of the Bank of England Financial Stability Report and subsequent press conference with Governor Mark Carney are in focus in European trading hours. UK credit conditions are their most accommodative in nearly three years (according to data from Bloomberg), spurring worries about malinvestment that may set the stage for market turbulence.

This has markets speculating that the policy-setting FPC committee might signal an intent to claw back some of the generous liquidity provision put in place ahead last year’s Brexit referendum. Comments confirming as much might be interpreted as a first step toward broader tightening and boost the British Pound. Alternatively, a commitment to press on with the status quo might hurt the UK unit.

Later in the day, the spotlight will turn to a speech from Fed Chair Janet Yellen. Traders will look for rhetoric that goes beyond familiar generalities to convince investors that the central bank’s confidence in forecasting another rate hike in 2017 is not misplaced. For their part, the markets price in no further changes in the baseline lending rate at least until early next year.

Investors are well-versed in the Fed’s argument that recently weak data flow – particularly on the inflation front – is a temporary development. Saying so again is unlikely to sway opinions. If the FOMC truly intends to tighten further it will need to dial up the rhetoric, lest an out-of-consensus rate hike triggers undesirable volatility. If Yellen delivers a convincing performance on this front, the US Dollar will likely gain.

The Australian and New Zealand Dollars outperformed in otherwise quiet overnight trade. The two currencies traded inversely of a drop in benchmark US 10-year Treasury bond rates, hinting that a dovish shift in the expected Fed policy path may have bolstered the relative appeal of higher-yielding alternatives. The move may reflect pre-positioning before Janet Yellen picks up the microphone.

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Asia Session

Pound May Turn Volatile on FSR Release, US Dollar Eyeing Yellen

European Session

Pound May Turn Volatile on FSR Release, US Dollar Eyeing Yellen

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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