Lee Hardman, Currency Analyst at MUFG, notes that the US dollar is continuing to test key technical resistance levels in the near-term which increases the risk that strength will accelerate further heading into year end.
“The testimony today from Fed Chair Yellen could provide an important catalyst for the US dollar although we doubt that it will derail upward momentum. Firstly, the market will be watching closely to see if Chair Yellen backs up the market’s current pricing that the resumption of Fed rate hikes in December is almost a done deal. Her reaction to any questions over the recent sharp move higher in US interest rates and stronger US dollar would be interesting.”
“Secondly, the market will be watching closely to see if she provides any signal over how the outlook for Fed policy could change under President Trump. Looser fiscal policy should encourage a faster pace of Fed rate hikes. The third main area of interest for the market will be to see if Fed Chair Yellen signals a greater willingness to let the US economy run a little hot and tolerate an inflation overshoot.”
“Fed Chair Yellen could take some of the wind out of the US dollar’s sails if she does not send a clear signal over the likelihood of December rate hike and/or signals a greater tolerance to allow inflation to overshoot. It is not our base case scenario but they do pose some downside risks for the US dollar.”
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