Forex today: US dollar and U.S. rates higher on Fed expectations

Once again the market was driven by prospects of a Fed hike this month. The date is fast approaching, 15th March, and the next set of data this week to watch out for in the main will be the nonfarm payrolls on Friday. Should this data live up to expectations, then this could well seal a deal for the next FOMC meeting. 

As a result of the optimism and renewed confidence in the Fed, the US dollar and US rates have been edging higher on a daily basis and today was no exception. The US 10yr treasury yields climbed higher again today from 2.49% to 2.51%, an important milestone that opens prospects for higher still towards this year's highs at 2.61%. On the back of this, the US dollar index is 0.2% higher before the close at the time of writing. Gold also dropped to a 4-week low. Continuing to monitor the April Fed fund futures, this has now risen to 0.87%; this implies a 100% chance of a rate hike in March. 

Data was limited in the US session with just the US trade balance for January that came in line with expectations of -USD48.5bn and at a five-year low. The US dollar strength could continue to damage US exports along the way and is something that could become a concern in markets in the medium term and weigh on the greenback going forward. 

Meanwhile, there were a number of European political headlines crossing the wires, supporting the euro but weighing on the pound. As we head towards the Dutch and French elections, this will be sure to be a key driver, especially as the market prices the Fed in fully and looks to alternative catalysts to keep the all of us in business.  

Despite the political positives, with the ECB coming up this week, the euro dropped 42 pips from the 1.06 handle. The yield differentials were driving USD/JPY higher from 113.74 to 114.15 and the pound below the 1.22 handle to a low of 1.2168. The antipodeans were under performers with the Aussie giving up post RBA gains on the 0.76 handle. AUD/USD was falling back to 0.7574 the low. The Kiwi also fell to a new two-month low at 0.6954 weighed by further drops in global milk prices of 12.4%. This has been the main driver of the divergence between the antipodeans in the cross.  AUD/NZD is better-bid to a ten-month high at 1.0910 after the expected GTD price index falling by 6.3%. However, this had been telegraphed by futures and came as no surprise. The GDT WMP has now fallen by 23% YTD. 

Day ahead

China is the focus in Asia with the trade balance while the ADP report in the US session could be earmarked as a prelude to the nonfarm payrolls showdown on Friday - Another positive report is expected with a gain of 180k.

Main topics in U.S. session

• DXY inter-markets: rally looks healthy
• An upside surprise from Friday’s US payrolls report would seal the case for a 15 March rate hike - Westpac
• AUD/NZD: better bid, target 1.1050
• UK: House of Lords votes 366 to 268 to accept Brexit amendment - BBG
• Gold drops further below $1220 to lowest in 4 weeks
• Sell EUR/USD: policy and rate differential driven trade - Westpac
• NZD/USD having a difficult time moving off lows
• GBP/USD intermarket: US 10y yields through 2.50%, GBP to drop to 1.2000?
• EUR/GBP: better bid on French polls, US yields/intermarket and Brexit fears
• Elabe Poll: Either Macron or Fillon to beat Le Pen in second round