Dollar Slow to Warm to Hawks

The market is seemingly saying, “we've been burned by this before” as the dollar reluctantly rises on optimism from the Fed. USD led the way on Monday while the yen lagged. The central bank calendar is busy in the day ahead. CADJPY Premium trade will be kept as is but members are free to adjust the stop.

The Fed's Dudley took center stage on Monday as the market struggles to anticipate what's next from the FOMC. The market is pricing in just a 21% chance of a hike in Sept and 43.5% in December. According to the NY Fed chief, the outlook is far rosier than that. He said he was “very confident” in the economic expansion forecast wage growth would quicken. He showed none of the caution we heard from Kaplan Friday.

The dollar initially climbed 15 pips on his comments but a steady bid continued through the day that pushed USD/JPY up 66 pips and EUR/USD down to 1.1150. Both moves were enough to erase Friday's action.

The slow grind underscores the acrimonious history the market has with Fed hawks. The Fed has overestimated growth and inflation every year since the crisis. To start the year, the in-vogue trade was reflation but it's been a dud.

So the question is to bet on recent history and or bet on the Fed getting it right this time. The lack of conviction in both camps is going to make it a back-and-forth battle as the data rolls in.

What's especially interesting is that other central banks have increasingly similar views as the Fed. The minutes of the June RBA meeting are due at 0130 GMT and are likely to highlight a similar stance. At that meeting, Lowe brushed aside a weak Q1 and forecast better growth ahead. AUD has been a strong performer since.

The minutes are part of a day with a heavy central bank focus. The PBOC's Zhou will speak 30 minutes earlier and later highlights include Carney's Mansion House speech along with the Fed's Fischer and Rosengren.

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