By Stephen Innes
Whatever debate there was regarding the March 15 FOMC was indeed settled by Fed Chair Janet Yellen's remarks to the Executives' Club of Chicago on Friday. March is on! Equity markets took the comments in stride as investors view the rate hike as a positive, reflecting an economy that is strengthening. The forex markets' reaction was somewhat guarded as the dollar came off intraday highs, with the March rate hike is now completely priced. This price action suggests that further dollar upside is limited near term. We've moved from 30% to 80% probability of a March hike in a mere two weeks, so post-Yellen profit taking was always in the cards.
Although I view the March hike as a preemptive strike, I suspect at this stage only an outlier NFP similar to last May which derailed the Fed's June 2016 rate hike would alter the FOMC decision for March. But the real concern for dollar traders is the trajectory for interest rates in 2017. Dr. Yellen did take the sting out of her hawkish delivery by referencing data dependency. However, if the data suggests that employment and inflation are close, and if President Trump follows through with infrastructure spending and tax cuts, traders will then start thinking about the possibility of the fourth hike in 2017, and this will boost the US dollar outlook significantly
Eyes will be on Monday's RBA cash rate decision, and while the RBA is unlikely to shift away from its neutral stance, as usual, the markets will be attuned to the Central Bank's views of both domestic and international markets evolution.
In early trading, the Aussie is perched just below 76 on a combination of USD longs' profit-taking and buoyant risk sentiment after the equity markets took Dr. Yellen's remarks well. So long as the global growth story line remains firmly intact, support for the Aussie dollar should remain robust near term.
USDJPY continues to hold, but the top-side momentum based on March has slowed considerably. As we enter the Fed blackout period, the dollar will get zero support like it did last week from the hawkish chorus of Fed speakers that were underpinning the greenback. Dealers are looking at 114.95 (Feb high) as the key for further topside momentum, but at his stage, it's looking like a bridge too far to cross.
The EUR risk profile is changing with higher-than-expected EU PMI and German inflation surging. Rate curve volatility is picking up, so the higher rates should keep EUR supported near term, even more so as French election risk is abating with Le Pen losing ground in the polls.