⏳ Final hours! Save up to 60% OFF InvestingProCLAIM SALE

Yellen Fails To Deliver: Is The Dollar Dead?

Published 2017-07-12, 04:49 p/m
EUR/USD
-
GBP/USD
-
USD/JPY
-
AUD/USD
-
USD/CAD
-
NZD/USD
-
DX
-

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Investors have been skeptical of the Fed’s hawkishness in the days leading up to Janet Yellen’s testimony and when she failed to sufficiently emphasize the improvements in the economy, the dollar U-turned as the bulls abandoned their trades quickly. USD/JPY dropped below 113 and EUR/USD rose to 1.1480. However by the end of the North American trading session, USD/JPY moved back above 113 to settle above this key level and EUR/USD came off its highs after having dipped briefly below 1.14. Which leads investors to wonder if we’ve seen the end of the dollar’s rally, at least for the time being. To answer that question, we need to look at what Yellen said. In her prepared comments, she said additional gradual rate hikes will be needed over the next few years but rates won’t have to rise much further to get to neutral. More importantly she said everything hinges on inflation, which is the key uncertainty and right now it is running below their goal, having declined recently. These are not the words of a hawkish central banker who wants to pound the table for additional tightening this year and with another move not expected to happen until December, time is on her side. So while we don’t think the dollar is dead, we could certainly see USD/JPY drop to 112.50, possibly even 111.80 before buyers return. At the end of the day, the Fed is still telling us rates will rise again, but September is off the table.

The Canadian dollar, on the other hand, took out 3 big figures to rise to its strongest in nearly a year versus the U.S. dollar.
As expected, the Bank of Canada raised interest rates by 25bp and upgraded its 2017 and 2018 GDP forecasts. BoC attributed the slowdown in inflation to temporary factors and while Governor Poloz said they need to carefully gauge the impact of higher rates, he also said there is “no doubt interest rates will be higher over time.” With the recent improvements in data, the “economy no longer needs as much stimulus” and the upward revisions in GDP showed the output gap closing sooner than they previously anticipated according to Deputy Governor Wilkins. Poloz now sees inflation returning to target within a year. These unambiguously positive comments created a second wave of CAD buying that should take USD/CAD down to 1.25. The Australian and New Zealand dollars also benefitted from the slide in the U.S. dollar and higher commodity prices. AUD/USD rose for the fourth day in a row as consumer confidence rebounded in July. China’s trade balance was due Wednesday evening and importsexports should have a significant impact on AUD and NZD. While AUD/USD looks like it could hit 77 cents, NZD/USD has significant resistance near 0.7285.

Wednesday's most unusual performance goes to the euro, the only currency that did not benefit from the anti-dollar rally.
Instead of rising like the JPY, GBP, AUD, CAD and NZD, the euro fell sharply after Janet Yellen’s testimony. Data was good with Eurozone industrial production rising more than expected. In fact, the pace of growth in May was the strongest in 6 months. Wholesale sales in Germany also stabilized after falling the previous month. The only thing holding EUR/USD back is the decline in European yields. The European Central Bank meets next week and there’s some worry that it may not be eager to talk taper.

Sterling, on the other hand, held up well throughout the North American trading session thanks to stronger labor data.
The 175K increase in 3-month employment was well above the market’s 120K forecast. Jobless claims rose less than the previous month and while average weekly earnings growth slowed to 1.8% from 2.1%, earnings ex bonuses grew at a faster pace of 2%. Although these numbers do not scream rate hike, between the sell-off in the U.S. dollar and technical support above 1.28, the labor-market report was the perfect excuse for sterling bulls to bid up the currency. But as long as GBP/USD holds below 1.2930, we are still bearish. Bank of England member Broadbent did not talk monetary policy in his speech on Wednesday but in a newspaper interview, he said point-blank “he is not ready to support a rate hike” as he “sees lots of imponderables in economy.” So as long as GBP/USD holds below 1.2930, we still see a move down to 1.2720.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.