Yellen's comments boost USD, ECB meeting to be a non-event

Forex News and Events

USD gets temporary boost from Yellen’s hawkish comments (by Arnaud Masset)

Investors reacted sharply to Fed Chair Yellen yesterday as she stated that waiting too long before continuing to rise rates against the backdrop of accelerating inflation could risk a “nasty surprise”. Initially, the US dollar got a solid boost and appreciated against most currencies: 0.60% vs. the EUR, 1% vs. the yen and 0.40% vs. the CHF. As expected, the Mexican peso was the worst performer yesterday with USD/MXN printing at a new historic high of 22.0098 amid the double whammy of Yellen’s speech and Trump’s inauguration tomorrow.

Even though the market is fully aware that inflation could seriously accelerate throughout the year, it also knows that this will highly depend on what Trump delivers. Looking at the behaviour of the foreign market, we note that investors are not fully buying into the Trumpflation story - not to mention that inflation expectations are reversing somewhat.

In such an environment, high quality commodity currencies such as the Aussie and Kiwi are amongst the best performers within the G10 complex. In contrast, market participants seem reluctant to hold emerging market currencies such as the Chilean and Colombian peso, which were down 0.40% and 0.48% respectively yesterday, while in Asia, the Korean won slid 0.92% against the greenback with USD/KRW jumping to 1,177.50. However, the wind has started to change again as investors brace themselves for tomorrow and limit their long USD exposure.

Yellen hawkishness gives USD a boost (by Peter Rosenstreich)

USD continues to firm on the back of Fed Chair Yellen’s hawkish comments. The unexpected remarks triggered a rally in short-end yields, supporting USD against low yielding, rate sensitive G10 currencies (JPY and CHF). Expectations for a Fed interest rate hike in March jumped from 30% to 35%. Yellen warned that the US risked a “nasty surprise” if they postponed tightening monetary policy too long. She reiterated her view that if the Fed sits back and then have to race to catch up that this could tip the US into recession. Yellen went on to indicate a “few” (likely signalling three hikes) in 2017 (cycle lasting until the end of 2019). We suspect that the pace of hikes suggested by Yellen is quick given the US economic acceleration in a probable down cycle. However, the unknown is clearly the effect of President Trump. On one hand you have a pro-growth agenda, which would accelerate economic actively and force the Fed to push the brakes. Yet, on the other hand, the brewing trade war between US and China, reinforced by Commerce Secretary nominee Wilbur Ross' anti-china comments to Congress, could easily grind activity to a standstill. We view the potential of a fully fledged US-China Trade war in 2017 as a real possibility. Ross has promised to push through Trump's protectionist trade agenda and personally has an axe to grind with China after Ross' years of being undercut by the Chinese in steel and coal. In the near term, heading toward the US presidential inauguration with the US rate curve underpricing and Yellen's additional rate hikes, we anticipate further USD bullish momentums. Long USD against MXN and JPY remain the highest probable trades in our view.

Don’t sleep through ECB (by Peter Rosenstreich)

The European Central bank will meet today but it is universally expected that no change in policy will result. Yet despite the uneventful expectations there is room for some minor fireworks. December’s meeting resulted in key interest rates remaining unchanged for the sixth consecutive session but asset purchases were reduced to €60 from €80 and extended till March 2017. European economic data has continued to firm, while the political uncertainty emulating from the US has allowed the euro to remain weak further supporting economic expansion. Given the realized macro environment (disconnected form the hype) we have growing expectations for signals of additional policy modification (we consider Dec adjustment to be tightening). Any positive comment on the outlook for inflation such as a steepening trend in wage growth will be euro bullish. Despite the approaching European political drama and Italian risk we feel that the ECB is inching towards signaling the end of unorthodox monetary policy (likely in Sept). In the short term, we are constructive in expectation of a hawkish surprise with EURCHF current recovery bounce extending to 1.07600 and EURJPY to test the range high at 123.75.

 

Today's Key Issues	Country/GMT
Dec Producer & Import Prices MoM, exp 0,20%, last 0,10%	CHF/08:15
Dec Producer & Import Prices YoY, exp 0,10%, last -0,60%	CHF/08:15
Nov ECB Current Account SA, last 28.4b, rev 28.3b	EUR/09:00
Nov Current Account Balance, last 6086m	EUR/09:30
Jan IGP-M Inflation 2nd Preview, exp 0,90%, last 0,41%	BRL/10:00
Jan IBGE Inflation IPCA-15 MoM, exp 0,38%, last 0,19%	BRL/11:00
Jan IBGE Inflation IPCA-15 YoY, exp 6,01%, last 6,58%	BRL/11:00
janv..19 ECB Main Refinancing Rate, exp 0,00%, last 0,00%	EUR/12:45
janv..19 ECB Marginal Lending Facility, exp 0,25%, last 0,25%	EUR/12:45
janv..19 ECB Deposit Facility Rate, exp -0,40%, last -0,40%	EUR/12:45
Jan ECB Asset Purchase Target, exp EU80b, last EU80b	EUR/12:45
janv..13 Gold and Forex Reserve, last 377.7b	RUB/13:00
Nov Manufacturing Sales MoM, exp 1,00%, last -0,80%	CAD/13:30
ECB Holds Monetary-Policy Meeting, Followed by Press Conf.	EUR/13:30
Dec Housing Starts, exp 1188k, last 1090k	USD/13:30
Dec Housing Starts MoM, exp 9,00%, last -18,70%	USD/13:30
Dec Building Permits, exp 1225k, last 1201k, rev 1212k	USD/13:30
Dec Building Permits MoM, exp 1,10%, last -4,70%, rev -3,80%	USD/13:30
janv..14 Initial Jobless Claims, exp 252k, last 247k	USD/13:30
janv..07 Continuing Claims, exp 2075k, last 2087k	USD/13:30
Jan Philadelphia Fed Business Outlook, exp 15,3, last 21,5, rev 19,7	USD/13:30
janv..13 DOE U.S. Crude Oil Inventories, exp -1000k, last 4097k	USD/16:00
janv..13 DOE Cushing OK Crude Inventory, exp 300k, last -579k	USD/16:00

 

The Risk Today

Yann Quelenn

EUR/USD's momentum is still largely positive despite some consolidation. Hourly resistance is given at 1.0719 (17/01/2016 high). Hourly support lies at 1.0622 (intraday low) and 1.0341 (03/01/2017 low). Expected to see continued increase. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD has reached 1.2400 before bouncing lower. The technical structure seems to show positive potential. Hourly resistance is given at 1.2416 (17/01/2016 high) while hourly support is given at 1.2254 (19/01/2016 low). Expected to show further consolidation. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY continues to decline within a downtrend channel. The road remains nonetheless wide-open towards hourly support given at 112.58 (17/01/2017 low). Hourly resistance is implied by the upper bound of the downtrend channel. Expected to see further downside moves. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF's momentum is clearly bearish. The pair has broken support at 1.0021 (08/12/2016 low). Hourly resistance is given at a distance at 1.0344 (15/12/2016 high) . Key support is given at the parity. The road is wide-open for further decline. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Resistance and Support:

EURUSD	GBPUSD	USDCHF	USDJPY
1.1300	1.3121	1.1731	125.86
1.0954	1.2775	1.0652	121.69
1.0874	1.2432	1.0344	118.66
1.0661	1.2319	1.0054	114.58
1.0341	1.1986	0.9929	112.57
1.0000	1.1841	0.9632	111.36
0.9613	1.052	0.9522	101.2