Dollar: What Can Yellen Do For (To) the Dollar?

Talking Points:

• Dollar: What Can Yellen Do For (To) the Dollar?
• British Pound Looks for Inflation to Reinforce Rate Outlook
• Euro Gains Despite Draghi Weaponizing Next Policy Move

Dollar: What Can Yellen Do For (To) the Dollar?

A mixed session for the US Dollar and rebound for equities through the opening session of the trading week likely reflects hesitation on traders’ part to commit before meaningful event risk crosses the newswires. With Fed Chairwoman Janet Yellen scheduled to testify before Congress Tuesday and Wednesday, there is a meaningful probability that interest rate speculation and perhaps even investor sentiment could meet an abrupt change in bearing depending on the cut of the remarks. Yet, where there are a number of variables as to how this event can play out, the lead-in is frequently the same. Consolidation and balancing exposure before such major events is common. Therefore, the buoyancy in the S&P 500 and nudge higher from the Dow Jones FXCM Dollar Index (ticker = USDollar) is less telling than the index’s volume dropping back below 400 million shares and the FX-derived volatility index slammed back towards record lows.

Moving into the new trading session, some clarity will be offered: regardless of whether it is bullish, bearish or ‘status quo’. Though important, the retail sales and import inflation figures will be minimized as immediate market-movers. Yellen’s semi-annual monetary policy testimony before the Senate (she will have similar meeting in the House Wednesday) is scheduled for 14:00 GMT. This is an opportunity for candid question and answer for the central bank head. After her prepared statement, she will likely field questions that range from growth forecasts to monetary policy views to financial stability. Mrs. Yellen is quite adept at avoiding remarks that deviate from the carefully-crafted Fed script, but capital markets are increasingly sensitivity to nuance in monetary policy tone. This is particularly a concern when we consider the market’s own yield forecasts – measured by Fed Funds futures – are materially lower than the FOMC’s own average projections though 2015 and 2016. While the gap can close by the central bank easing back, the relative bearish impact to the dollar and bullish response from equities (and other risk-positive asset types) would be relatively modest. Speculators conforming to a future of higher yields would generate the bigger impact.

British Pound Looks for Inflation to Reinforce Rate Outlook

The Sterling kicked off the week on an unstable footing. In a retreat against most of its major counterparts, GBPUSD took the notable step of slipping back below 1.7100. While far from a break to a lasting bear wave, this is a caution flag for the currency’s 12-month bull trend ahead of an important round of event risk. Due in the forthcoming London session is June round of UK inflation data. This covers measures for a consumer basket (CPI), retailers (RPI), factories (PPI) and the housing sector. This is exactly the objective data that can give a lucid progress report on monetary policy options. Rather than assess BoE rhetoric, we will see whether the central bank’s primary mandate will be met to necessitate a rate hike. The consensus is for the key CPI reading to inch closer to target; but the question is whether the rebound from 5-year lows will last and pressure a policy response. Given the level of rate speculation, beware any ‘weak’ inflation readings.

Euro Gains Despite Draghi Weaponizing Next Policy Move

Few central bankers nowadays look to shock the market with sudden changes to their monetary policy bearings. The standard protocol is to signal preparations for significant moves well in advance by peppering the market first with questionable and then more explicit remarks. That seems to be what ECB President Draghi is doing. In testimony before the EU Parliament, the central banker said there was “unanimous” support in the council for “unconventional” policy measures and that QE “falls squarely” within the ECB’s mandate. Add that too his warning that a rising currency is a risk, and we have the motivations and means for further easing. Will they upgrade before TLTRO auctions?

Yen Crosses Don’t Find Charge from Another BoJ Hold

The Bank of Japan held its monetary policy meeting this morning and issued its decree to little fanfare. That is because the outcome falls right in line with what was expected. Keeping the particulars of the open-ended stimulus program (QQE) unchanged, remarks maintained a inclination against further accommodation. It may be that the central bank eventually does upgrade its effort, but it will likely take a substantive yen rally or inflation tumble to instigate. Meanwhile, their forecasts for GDP are stable and CPI in-line with targets.

New Zealand Dollar: It’s Difficult to Maintain Rate Hikes Without Inflation

The RBNZ has already raised its benchmark lending rate multiple times this year. It is by-far the most hawkish of the major central banks. And, while its policy warnings are adamant that further tightening will be needed, it is still seeing data fall short of its primary mandate. Inflation is the key to validating the tightening to this point, but it is still short of target. CPI for 2Q is due tomorrow morning and is expected to hit 1.8 percent.

Australian Dollar Unfazed by RBA’s Repeated Claims of an Expensive Currency

According to the RBA, the Australia dollar is expensive. This is a common remark from the central bank as it tries to ‘talk down’ its currency to offer some measure of economic relief through trade. Yet, this effort does not seem to be offering further marginal return. After the minutes were released this morning, the AUD is little moved. Speculators are awaiting any risk-cues from the Fed to judge this currency.

Gold Suffers Biggest Tumble in Seven Months - A Trend?

Gold plunged $31.50 (2.4 percent) Monday. The biggest drop in seven months is striking and worrying at the same time for gold bugs, but the conviction in the move carries a few caveats. Volume in futures and ETFs was relatively modest given the price movement, and the CBOE’s volatility measure offered a modest advance. With Yellen shaping yields, inflation and the dollar today; the real judgment is ahead.**Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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