Dollar strengthens on Yellen's willingness to raise rates in 2015

Yesterday’s market action

Risk assets this morning have been driven by three core factors. First, the incumbent political party in Spain lost significant ground over the weekend to the far left as Podemos and Ciudadanos saw an impressive gain in support throughout Spain's urban centres. The rising of the far left throughout Europe's periphery puts the block in a very difficult space in terms of how they deal with Greece. If they allow Syriza to achieve flexibility on reforms, then why can’t Spain, Portugal or Italy not ask for the same? Secondly, the internal conflict within Syriza does not bode well. In a vote over the weekend the far left of the party proposed refusing to pay back IMF loans, this was only just voted down at 95 vs 75 for the default. Third, slightly more hawkish then expected Yellen comments has seen strength go into the USD as she reiterates that rates can go higher this year if the data continues to show merit. This confluence of factors lead to interesting early morning moves as European equities were supported initially on the weaker EUR/USD (and the subsequent corroboratory trade so evident in recent weeks) before selling pressure pushed the DAX firmly through it's pivot level at 1184.00, setting the tone for the rest of the morning session.

Today’s View

For the US session ahead we expect the trends set for this morning to continue in the currency and commodity space. This is a call based on the assumption of a continued stronger USD and therefore should be adjusted should the raft of key US data this afternoon fail to meet expectations. Our USD view also gives rise to a short T-Notes entry, which may yield an opportune levels given the retracement we have seen this morning. However our S&P call goes against the mould slightly as although we do expect selling pressure to be evident we do not believe this will breach the 2113.50 level which has been so powerful over recent weeks. As always US equity calls can be more difficult on US data until is becomes evident how the market will interpret better or worse than expected data, i.e. is a beat good news based on economic fundamentals or bad news given the expectations of the first Fed hike. As a reminder this afternoon we have US Durable Goods Orders at 13.30, Composite and Services PMI at 14.45 and New Home Sales at 15.00 (all times BST).