FX market outlook

FX market outlook

Dollar boosted by more hawkish Fed speak; Brainard lifts expectations of March rate hike.

Dollar strength dominated the markets as a more hawkish tone from the Fed raised the probability of a rate hike this month. FOMC member Lael Brainard, who is usually dovish, gave a hawkish speech yesterday and hinted at an early rate increase.

Brainard’s bullish comments follow those of other Fed speakers who have also recently supported their view that it was appropriate to increase rates soon. Earlier this week, New York Fed President William Dudley, who is usually dovish, said the case for tightening now is “a lot more compelling”. San Francisco Fed President John Williams also signaled he was in favour of a rate increase at the next Fed policy meeting.

Focus now turns turn to Fed Chair Janet Yellen’s speech on Friday, when investors will look for more clues on the US central bank’s rate hike path. Fed Vice Chair Stanley Fischer is also due to speak tomorrow.

US President Donald Trump’s fiscal spending plans are seen to be positive for growth in the US economy, giving the opportunity for the Fed to normalize policy and hike rates at a faster pace. The odds for a March Fed rate hike have now risen to 80%, giving a boost to the dollar. Trump’s toned down speech in front of Congress on Tuesday was welcomed by the markets, as he talked of a $1 trillion infrastructure spending plan to stimulate the economy, which also helped lift the greenback.

The broadly stronger dollar due to a turn in Fed rate hike expectations, pushed gold lower and kept the euro and sterling under pressure.

Soon after Lael Brainard’s speech in the early hours of the Asian session today, dollar / yen shot up to rise back above the key 114-yen level. The euro dropped from a session high of 1.0550 to reach 1.0521. Cable slipped to a 6-week low of 1.2260.

Looking ahead to the rest of the day, Eurozone CPI And UK construction data are due. Out of the US, focus will be on jobless claims numbers.