Fed Comments Drive Dollar Higher

U.S. monetary policy driving markets

The prospect of a hike in U.S rates at the upcoming FOMC meeting is the main driver, with the dollar making gains against all the major currencies. The dollar index, which measures the USD against six of it trading partners, rose by 0.2% yesterday and is up almost 1% on the week, as a change in U.S. monetary policy looms.

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

Sterling fared a little better than the other major currencies against the stronger dollar. It has been unable to regain the 1.2300 level but recovered to 1.2270 on the day, having fallen to 1.2245 earlier.

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.