FX market outlook

FX market outlook

Dollar fades strength ahead of Fed Chair Yellen’s speech; yen gains after Japan CPI.

The dollar faded its recent strength that was driven by increasing confidence that the Federal Reserve will raise rates this month. The yen strengthened after four days of losses, following data that showed a moderate rise in Japanese inflation.

Japan’s core CPI number rose 0.1% year-on-year in January and was the first increase since December 2015. It was expected to remain flat after a 0.2% decline in December. The uptick in inflation would be a relief for the Bank of Japan, although the rate still has a long way to go to reach the Bank’s 2% target.

The data helped boost the yen against the dollar, giving it some reprieve after four consecutive days of losses. Dollar / yen eased down to an Asian session low of 114.06 after the pair hit a 2-week high of 114.58 yesterday.

The dollar index took a breather today after rising to its highest level since January 11 yesterday, on the back of rising expectations for a March rate hike by the Fed at its upcoming policy meeting. Several Fed officials speaking in recent days, indicated their support for higher rates soon and this has raised the implied probability of a move by the Fed this month.

All eyes now turn to Fed Chair Janet Yellen and Vice Chair Stanley Fischer who are both due to speak in Chicago later today. Investors will look for more insight into the US central bank’s rate hike path but many expect them to maintain the Fed’s recent hawkish tone. Other Fed officials due to speak today include Charles Evans, Jeffrey Lacker and Jerome Powell. From tomorrow, the Fed will enter a blackout period until its policy meeting on March 14-15.

The pull back in dollar strength helped the euro and sterling trim losses. The euro moved off a 7-week low hit yesterday at 1.0494 to rise to an Asian session high of 1.0526. Cable was steady between 1.2254 1.2282.

Commodity-linked currencies were weighed by falling commodity prices that were hit by a broadly strong dollar. The aussie / dollar fell to a 1-month low of 0.7542. WTI oil is consolidating losses after falling to a 3-week low of $52.52 a barrel yesterday. Gold extended losses during the Asian session to reach a 2-week low of $1225.39 an ounce.

Looking at economic data for the rest of the day, focus will be on services PMI surveys that will be released out of the Eurozone, the UK and the US. The highlight of the day will be Fed Chair Janet Yellen’s speech in Chicago.