Forex: Hawkish Fed rate hike talk sends USD higher

Donald Trump’s first address to Congress last night was expected to inject more volatility into the markets.

However he was beaten to the punch by New York Fed President William Dudley, who said in an interview shortly before the US President’s speech that he sees a Fed rate hike in the ‘relatively near future’ – sending rates on US Treasuries higher along with the USD.

John Hardy, Head of FX Strategy at Saxo Bank explains. More of John’s research can be seen at Saxo Bank’s

FX Update: Recycled Trump rhetoric and hawkish Fed boost USD

  • March rate hike probability strongly increased
  • Not much new in Donald Trump’s speech to Congress
  • USD boosted by Fed rhetoric and lack of negative surprises in Trump’s speech
  • Euro looking rather soft here as risk appetite comes storming back higher
  • USDJPY, as the pair rebounded smartly from key supports
  • USDCAD was the first USD pair to break through a major resistance level yesterday

John Hardy, Saxo Bank

About ninety minutes ahead of US President Trump’s highly anticipated speech before a joint session of US Congress, the New York Fed’s Dudley waxed a bit more hawkish than we are accustomed to from and, as he is considered likely close to the core of the Fed, including Chair Yellen, that has traditionally been very dovish, so this lead the market to aggressively up the odds of a March rate hike.

Then came Trump’s address to Congress. Some comments pointed to a more “presidential” appearance than we’re accustomed to, though the specifics in his rhetoric were lacking. Much of the speech was a recycling of every major point he has been making all along, though his description of the tax treatment of US exports abroad versus imports into the US sounded indirectly supportive of some kind of border tax adjustment.

Regardless, there was nothing in Trump’s speech to disappoint USD bulls (though there was also no mention of the technically very important March 15 debt ceiling holiday expiry) and the supportive stream of Fed rhetoric, particularly from Dudley was perhaps even more relevant than anything Trump had to say.

In the French election run-up, we are seeing Macron’s odds picking up and increasingly pulling even with Le Pen for a first round win, which would set up a cakewalk for the second round. In any case, Germany-France bond yield spreads have eased back, as have the peripheral spreads.


USDJPY came back just from the brink of support, as the Ichimoku cloud remain unbroken on a daily closing basis and the recent 111.60 area lows held. The rally was accompanied by the important support of higher US yields. This latest move underlines the importance of the sub-112.00 lows and puts 115.00 in our sights as the next key upside focus, as it is a round level, the Ichimoku cloud resistance and near the recent highs.

Source: Saxo Bank

The G-10 rundown

USD – a fairly straightforward setup for the greenback here, which was boosted by Fed rhetoric and lack of negative surprises in Trump’s speech. Now it is about whether we hold and whether the PCE inflation data for January is supportive today. Expected is 1.7% YoY for the PCE core – a reading of 1.80% or higher would be the highest since 2012 and 1.9% would seem to cinch a March rate hike, barring a disaster at next week’s US employment report.

EUR – The euro looking rather soft here as risk appetite comes storming back higher and despite the easing of peripheral fears – at least those connected to France. Watching the 1.0500 level in EURUSD as this looks like the last level guarding progression lower to the sub-1.0350 lows.

JPY – As one would have expected, the significant upgrade of the Fed rate hike outlook and boost to long term yields yesterday saw the most significant reaction in USDJPY, as the pair rebounded smartly from key supports. The next level, as indicated in the chart caption above, is 115.00.

GBP – sterling traders likely eyeing today’s UK Manufacturing PMI to decide whether once again to try the downside in EURGBP after two recent rejections of sell-offs. Meanwhile, GBPUSD is poised at key range support near 1.2350 and could plunge steeply on a UK data miss today.

CHF – unreactive to the situation once again – most interesting fundamental test for CHF would likely be the ECB signaling a taper.

AUD – a boost from a strong Q4 GDP print sees the AUD higher everywhere except against a resurgent US dollar. AUDNZD is easily the most interesting ADU pair technically at the moment as it has a look at the 1.0750 area once again. We like the pair much higher on a break.

CAD – Interestingly, USDCAD was the first USD pair to break through a major resistance level yesterday with a move well above the 1.3210 area. We have the odd combination recently of very cautious BoC rhetoric together with very strong Canada data surprises. Perhaps the BoC has seen enough of Trump now to think that his bark will be worse than his bite and CAD could pick up a bit of steam in some of the crosses (if not against the USD) if the BoC monetary policy statement is more balanced.

NZD – kiwi lower, most likely on an avalanche of AUDNZD buying on the strong AU data. RBNZ Governor Wheeler will speak at 2000 GMT and could help the kiwi lower on dovish rhetoric as NZDUSD has tried to break lower today and AUDNZD higher.

SEK – signs of resistance firming right at 9.60 and if risk appetite remains solid and this week’s remaining Euro Zone Manufacturing and Services PMI’s are supportive, EURSEK could push back to the cycle lows, recent Riksbank dovishness notwithstanding.

NOK – A chance here for EURNOK to reject the implications of a break up through 8.85 if we get a solid bar down today – but notable progress lower likely requires a significant boost to the oil price.

Upcoming Economic Calendar Highlights (all times GMT):

  • 0930 – UK Feb. Manufacturing PMI
  • 1300 – Germany Feb. Preliminary CPI
  • 1330 – US Jan. PCE Inflation
  • 1500 – Canada Bank of Canada to issue policy statement
  • 1500 – US Feb. ISM Manufacturing
  • 1900 – US Fed’s Beige Book
  • 2000 – New Zealand RBNZ’s Wheeler to Speak
  • 2300 – US Fed’s Brainard to Speak

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