USD Index spiked higher in a week driven by Yellen and good US data

This week’s highlight was Fed Chair Yellen’s semi-annual testimony which saw the USD-index initially spike higher towards the 95.00 handle following comments that a change in guidance means that a hike can take place at any meeting, therefore giving off a more hawkish tone. This sentiment was also further bolstered by Yellen stating that the employment situation is improving and inflation expectations have remained stable, while in the mid-term the committee sees inflation rising gradually. However, this sentiment was short-lived as markets perceived this was not a direct change in direction from the Fed but was more the Fed Chair communicating how the Fed will likely hike rates thus sending the USD-index on a downward trend. Thereafter, on the penultimate day of the week, positive US CPI and Durable Goods Orders alongside hawkish comments from Fed’s Bullard downplaying the negative implications of a stronger currency ignited a surge in the USD-index as the greenback closed the session higher by 1.4%. In the Eurozone, sentiment was buoyed as discussions between the Eurogroup have made progress this week as the German Bundestag voted in favour of accepting Greece’s bailout extension, although this did not impact the market as this outcome was widely expected. Elsewhere, the hawkish comments from the BoE MPC members Shafik, Weale and Forbes indicating that a rate hike may occur earlier than market expectations which supported GBP.

Elsewhere, focus has been on AUD/USD ahead of the RBA rate decision on March 3 rd with Deutsche Bank, JP Morgan and Westpac all bringing forward their forecasts for a 25bps rate cut next week, and with markets now pricing in a 54% chance of a rate cut. However, a video of RBA watcher McCrann was passed around desks with the commentator suggesting he expects the RBA to stand pat on rates for the moment which saw AUD/USD edge higher in the session.

From a central bank perspective, the Turkish Central Bank cut their benchmark repurchase rate and its overnight borrowing rate by 25bps, while also cutting its overnight lending rate by 50bps. This saw a whipsaw reaction in USD/TRY upon the release as the overnight lending rate cut was greater than analysts had forecasted, only to pare the move higher after the smaller than expected cut in the overnight borrowing rate. In related news, the subsequent USD strength sent USD/TRY to record highs today with analysts at SocGen predicting the TRY to weaken further.

Looking ahead, next week sees a slew of rate decisions from the BoE, ECB and RBA with the ECB potentially announcing a start date for their QE programme. Furthermore, market focus will also be on US NFP with analysts expecting a reading of 240K, which is still above the key psychological level of 200K, but slightly lower than the previous headline number of 257K.