Talking Points:

  • US Dollar broadly higher as Fed’s Yellen stokes rate hike speculation
  • Rates-linked Aussie Dollar drops, NZ cousin holds up as RBNZ nears
  • Pound sinks as worrying news-flow grabs the spotlight amid data lull

The US Dollar traded broadly higher in Asia Pacific hours, gaining ground on all of its top counterparts. The currency rose alongside front-end bond Treasury yields, hinting at firming interest rate hike bets in the wake of hawkish remarks from Fed Chair Yellen. The appearance of a loose framework for US tax reform was seemingly helpful as well. The priced-in probability of a late-2017 rate hike is now 70 percent.

The rates-sensitive Australian Dollar bore the brunt of selling pressure, weakening against the spectrum of G10 FX alternatives. The similarly carry-oriented New Zealand Dollar managed to hold its ground however. Traders were probably wary of directional commitment ahead of the upcoming RBNZ policy announcement, the first sit-down since Grant Spencer took over as acting Governor.

The British Pound shot lower, with the selloff seemingly inspired by two worrisome headlines crossing the wires. First, the US hit airplane manufacturer Bombardier with a tariff of nearly 220 percent after it lost a trade dispute round with Boeing. The move threatens over 4,000 jobs at the Canadian firm’s UK operation and drew condemnation from Prime Minister Theresa May.

Second, a story from the Telegraph reported that Ms May’s watershed speech in Florence accepting a so-called ‘divorce bill’ fulfilling the UK’s pre-Brexit commitments – until then a major sticking point in negotiations – was “dictated” by representatives of the regional bloc. Perhaps the markets took the revelation to mean London might be pressured to take a harder line going forward.

Looking ahead, a quiet day on the European economic data front seems unlikely to produce fireworks. From there, US statistics on durable goods orders and pending home sales probably won’t make much of a splash as markets look ahead to the more policy-relevant GDP and PCE figures. A batch of speeches from dovish-leaning Fed officials rehashing familiar themes may also pass with little notice.

On balance, this hints that overnight trading patterns face few roadblocks to continuation. However – as Sterling’s plunge aptly demonstrates – the absence of a clear-cut focal point makes for a headline-sensitive environment. The threat posed by knee-jerk volatility is understandably elevated in such conditions, warning market participants to proceed with caution.

Have a question about trading FX markets? Join a Q&A webinar and ask it live!

Asia Session

US Dollar Gains on Yellen Speech, Pound Succumbs to Headline Risk

European Session

US Dollar Gains on Yellen Speech, Pound Succumbs to Headline Risk

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

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

To receive Ilya's analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak