Risk on, dollar off ahead of yelling Yellen tomorrow

Risk on, dollar off ahead of yelling Yellen tomorrow
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(February 13, 2017) The markets continued to respond to the Trump – Abe meeting on Friday, with risk appetite improving through the Asian session, the Yen down 0.51% on the day going into the European session, with European equities kicking off the week in the black.

The rest of the majors had barely moved ahead of the European open before the Dollar eased, the Dollar Spot Index down 0.08% on the open.

There was little noise through the weekend to cause the markets to reverse the upbeat sentiment through the final 2-days of last week and with Trump now likely to be busy planning a meeting with China, preparing for the tax reforms, whilst also focusing on how to deliver on promises made from Friday’s meeting with the Japanese Prime Minister, we can expect the markets to begin shifting attention away from the Oval Office to the FED and macroeconomic data scheduled for release in the early part of the week.

There’s a lack of conviction in the markets at present on when the FED will be willing to make its first move of the year. As things stand, while the FED has pointed to 3 hikes for the year, the market has 2, suggesting that the FED will be on hold through to at least June.

The FED’s Vice Chair Fischer spoke over the weekend of the increased uncertainty about fiscal policy under Trump, adding that the FED will remain focussed on labour market and inflation data as a result, which will have muted the upward effects of the new of tax reforms on the Dollar over the near-term, the likely cause for Dollar weakness going into the European session.

Forward guidance from the FED has continued to confuse the markets at the start of the year and a lack of economic data out of Europe and the U.S through the day will leave little else to consider other than Trump’s shift in approach to foreign policy, the rising geo-political risk levels in Europe and of course, Yellen’s testimony to Congress tomorrow.

Economic data out of the U.S has yet to disappoint and recent commentary from Yellen has been perhaps more positive than normal, though there has yet to be any hints on when the FED will move.

Congress will likely want to corner the FED Chair on monetary policy through the 2-days of testimony, particularly with such a shift in the political landscape in the U.S, though the FED Chair will certainly need to be careful, Trump having already shared his views on Yellen and the abilities of the FED in returning the U.S economy to the boomtown days.

As things stand it will be tough for the markets to expect the FED Chair to suggest a possible rate hike in March, particularly with only voting member Harker talking of March being a live meeting. While the view is that rates are on hold until the summer, one thing is certain, some direction is needed on monetary policy, as Trump embarks on economic reforms and hiding behind the U.S President and uncertainty is unlikely to be acceptable, the U.S administration progressing on delivering on campaign pledges and with little delay when considering just how recently the U.S president was inaugurated.

Macroeconomic data out of the U.S this week includes key stats for the FED to consider, retail sales and inflation for January due for release on Wednesday, the impact of data through the week will be dependent upon the views of the FED Chair on Tuesday. A hawkish Yellen will certainly make the Dollar more sensitive to the data, a dovish Yellen, leading the markets to discount any positive figures.

So the real question will be whether Yellen will be shouting from the roof tops tomorrow or playing it cool, hiding being the FED’s new word, ‘uncertainty,’ in the months ahead.

At the time of the report, the Yen was down 0.51% at ¥113.755 against the Dollar, while the Dollar Spot stood at 100.78, down 0.11%.

Our view is that the markets will need to take a more bullish view on the Dollar ahead of Yellen’s testimony, though a lack of stats will test the markets willingness to commit, key data out of the U.S this week scheduled for release on Wednesday, after Yellen’s key testimony on Tuesday, the 2nd day of testimony generally having little to no impact on the Dollar.

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