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US Dollar, Yen May Rise as Fed-Speak Revives Rate Hike Bets

US Dollar, Yen May Rise as Fed-Speak Revives Rate Hike Bets

Ilya Spivak, Head Strategist, APAC

TALKING POINTS – US DOLLAR, YEN, FED, WILLIAMS, AUSSIE DOLLAR, POUND

  • Yen gains as S&P 500 futures decline, hinting at a risk-off shift ahead
  • Pound manages tepid gains despite growing pressure on UK PM May
  • US Dollar may extend bounce as Fed’s Williams boosts rate hike bets

Corrective flows seemed to define price action for most G10 FX currencies at the start of the trading week. The US Dollar corrected higher after Friday’s selloff while the Australian and New Zealand Dollars backtracked having enjoyed impressive gains in the prior session. An uptick in trade war fears following some sharp comments from US Vice President Pence might have helped.

The British Pound also managed a cautious bounce after sinking to a two-month low amid Brexit-related worries last week. Sterling appeared to ignore news that 42 UK lawmakers signaled they’ve lost confidence in Prime Minister Theresa May. Six more such statements are needed to trigger a leadership challenge that may depose her and derail hopes anything but a "no-deal" divorce from the EU.

The Japanese Yen was something of a standout. The typically anti-risk currency rose even as Asia Pacific bourses followed Wall Street higher and despite having gained on Friday, thereby shedding the general tendency toward counter-trend moves. The move was accompanied by a drop in bellwether S&P 500 futures, hinting a risk-off pivot may be brewing ahead.

US DOLLAR, YEN MAY RISE AS WILLIAMS REVIVES FED RATE HIKE BETS

Incoming comments from New York Fed President John Williams may emerge as the catalyst for this. On Friday, the Greenback fell as the priced-in 2019 rate hike outlook implied in Fed Funds futures flattened. That followed comments for several central bank officials hinting that external jitters (such stress in emerging market assets or political tumult in Europe) may prompt a slowing of the tightening cycle.

Stocks tellingly rose in tandem, underscoring investors’ sensitivity to stimulus withdrawal. This means their optimism may fade if dovish speculation appears to be misplaced. Mr Williams may signal exactly that, reminding traders that policy is a function of domestic economic data first and foremost, with external headwinds a hurdle only to the extent that they show up there with negative effect.

As it is, US economic news-flow has steadily improved relative to consensus forecasts since late August even as global performance has deteriorated against the backdrop of tightening financial conditions worldwide. That hardly seems like the recipe for a dovish Fed policy pivot. To that end, rhetoric in support of data dependence may revive rate hike bets and souring sentiment, compounding USD and JPY gains.

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ASIA PACIFIC TRADING SESSION

Asia Pacific Trading Session Economic Calendar

EUROPEAN TRADING SESSION

European Trading Session Economic Calendar

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

FX TRADING RESOURCES

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

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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