Fed Comments Drive Dollar Higher
Morning mid-market rates – The majors
March 3rd: Highlights
- Rate hike prospects rising
- Yellen to reinforce market expectations
- Sterling falls but retains poise
U.S. monetary policy driving markets
The euro dropped through resistance at 1.0520 but managed to hold onto the 1.05 “handle”. There is major institutional interest for buying the single currency at 1.0480, but should the dollar continue to strengthen then that resolve is likely to be tested. There has been a lull in the political posturing in France and The Netherlands over the past few days but as we enter the final straight, there is sure to me more volatility ahead.
The Dutch General Election is on March 15th. Traditionally a low key affair given the “normal” voting habits of the electorate are pretty much cast in stone, that could be set to change should right wing candidate Geert Wilders continue to make ground. As the 15th also has the U.S. rate announcement,forecasts are for higher volatility.
There has been a stream of speeches all week from FOMC members, all saying in various ways that the likelihood of a rate hike is growing. Interest rate futures, which measure the probability of a rate hike, have also been rising and now show close to 80% probability of hike, having started the week at 35%.
Fed Chair Janet Yellen enters the fray today with a speech expected to add further fuel to the rate hike fire reinforcing the hawkish message.
The dollar is nearly 2% stronger against the Yen and the Euro is down 0.4%. We are approaching major technical levels which could cap dollar strength and once the reality of the hike is seen, a minor correction is possible. The weakness of the Yen was driven by inflation data which showed further deflation in the economy. Tokyo inflation fell by 0.3% in February slightly more than expected and added support to ultra easy monetary policy recently criticised by President Trump.
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Sterling ponders weaker fundamentals
A gradual weakening of economic data this week has seen the pound on the backfoot and with Brexit likely to start to feature more heavily from next week, the pace could accelerate. There are a number of support levels for the pound at 1.2225, 1.2180 and 1.2120 with obvious major support, both technical and emotional, at 1.2000.
A measured fall for the pound is not only to be expected but can be tolerated by the Bank of England. Although it will add to the inflationary prospects going forward, it is probable that they have factored in the “Brexit effect” pushing sterling lower when making their inflation calculations for the year ahead.
The Australian Dollar has seen a turbulent week, falling by 1.4% on the week as commodity prices were soft the U.S. Dollar powered ahead. It traded as low as 0.7543 before recovering a little to 0.7560.
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About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”