USD Jumped, Yen And U.S. Treasuries Slid On Yellen's Hawkish Comments

FTSE +8 points at 7255

DAX +25 points at 11625

CAC +9 points at 4862

Euro Stoxx +9 points at 3303

The headline inflation in the US accelerated to 2.1% year-on-year in December, in line with expectations. The data excluding food and energy prices rose from 2.1% to 2.2%y/y. In her speech yesterday, the Federal Reserve (Fed) Chair Janet Yellen said that the US economy is approaching the full employment and price targets, which stipulates that the Fed would raise rates as planned. The interest rates would be increased a ‘few times per year until the end of 2019’ according to Yellen; the total rise would sum up to 3%, approximately.

As of today, the market is predicting three US interest rate hikes in 2017. It is important to note that the pace of the Fed tightening will depend on Donald Trump’s fiscal stimulus plans and could be adjusted on the go.

The US dollar jumped, the yen and the US Treasuries slid on the back of hawkish comments from Janet Yellen. The US stock markets traded mixed, yet higher interest rate prospects pulled financial stocks higher.

The USD/JPY rebounded from 112.55/112.60 to 114.89 in Tokyo, as the US 10-year yields recovered above 1.40%. Nikkei and Topix gained 0.94%.

The appetite in Chinese stocks was again limited. Shanghai Composite retreated by 0.45%, as Hang Seng Index reversed yesterday’s gains, -0.51%.

In Sydney, AUD/USD buyers jumped in below the 0.75 level, as the Australian economy added 13.5K jobs in December (vs. 10.2K expected and 37.1K printed a month earlier). Good news was that more than two thirds were full-time jobs. Among the G10 currencies, the Aussie (+0.35%) recorded the biggest recovery against the greenback overnight. Although trend and momentum indicators are strongly bullish, higher US yields could dent the carry appetite. We turn neutral in AUD/USD and wait for a stronger signal to assess a fresh short-term direction.

The European Central Bank (ECB) meets today and is expected to maintain the status quo. ECB President Mario Draghi’s speech (13:30 GMT) will be the key highlight of the day. Draghi is expected to talk down the rise in December inflation and deliver a dovish accompanying statement due the pending Eurozone risks, such as the upcoming German and French elections, Greek and Italian debt and the Brexit.

The EUR/USD eased to 1.0622 on the back of the broad-based USD appreciation. Technically, the failure to clear the mid-term resistance at 1.0707 (major 38.2% retracement on post-Trump USD rally) could encourage a further decline toward 1.0567/1.0560 (minor 23.6% retrace / 50-day moving average). The divergence between the Fed and the ECB outlook should be supportive of a further slide in the EURUSD pair.

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Looking at the daily EUR/GBP chart, the formation of double bottom at 0.8625 hints at a slowdown in the euro’s appreciation against the pound. The EURGBP cross is currently hovering around its 100-day moving average, 0.8668. Meanwhile, solid offers define the topside in GBP/USD pre-100-day moving average at 1.2439.

The weak pound benefits to the UK stocks. The FTSE futures (+0.19%) were better bid in Asia.

The FTSE is called 8 points firmer at 7255p at the European open, while the DAX is expected to open 25 points higher at 11625.

Written By: London Capital Group