FX market outlook

FX market outlook

Dollar rises above 110 yen on looming Fed rate hike.

 
The US dollar continues to be bid today, extending gains above the key 110-yen level in Asian trading after Fed Cahir Janet Yellen signaled to markets that a rate hike could come relatively soon. In her testimony  before the Joint Economic Committee of Congress on Thursday, Yellen said that the US economy has made progress toward the Fed’s goals.. She expects moderate economic growth to continue, which would be sufficient to generate further strengthening in the labour market conditions. The Fed Chair also expects inflation to continue to rise to the Fed’s 2% target as the labour market improves.

Yesterday’s upbeat US economic data on housing, consumer prices and jobless claims added to the case for a rate hike. Meanwhile, the growing divergence in monetary policies of the Fed and the ECB is strengthening the dollar versus the euro.

The Fed is expected to raise interest rates by at least 25 basis points at the upcoming FOMC meeting on December 14, while the ECB, which meets on December 8, is expected to extend the time horizon of its quantitative easing (QE) programme.

The Fed’s policy path is also in contrast with the Bank of Japan’s monetary policy as the BOJ continues with policy easing. On Thursday, the BOJ offered to buy an unlimited amount of Japanese government bonds at fixed rates.

Dollar strength was the dominant theme of the currency markets today. The greenback rose to an Asian session high of 110.77 yen, the strongest level since May 29. The USDJPY pair is on track for a more than 3% gain this week.

The euro continued to weaken today and fell below the $1.06 level to as low as $1.0581, a level not seen since November 29, 2015. The single currency is down more than 2% for the week.

The dollar index, which tracks the US currency against a basket of six major currencies, rose to 101.32, its highest since April 2003. It has gained over 2% this week.

The economic calendar today is relatively light but certain speeches will attract the market’s attention. ECB President Mario Draghi is due to speak at the 26th European Banking Congress in Frankfurt. Meanwhile, Fed speakers will be closely watched and these include Federal Reserve Bank of New York President William Dudley and Federal Reserve Bank of Kansas City President Esther George.