Yellen Hints US Rate Hike Within the Near Term

Market volatility was in general nothing to cheer for last week as most markets were in “wait-and-see” mode ahead of Friday’s speech by Fed Chair Yellen. According to the Fed Chair, it would be “appropriate” to increase the interest rate should we see continuity in the pickup of US macroeconomic indicators. Markets have increased the odds of a June rate hike, derived from the implied probability on the futures, have increased to 34% from 30% ahead of the speech and on the July meeting, there is a 60% chance of a rate hike.

Despite the hawkish comments from Yellen, equity markets in developed markets continued on the bid for the second week in a row, while an increase in US yields triggered additional bids in the US Dollar – the US Dollar index has hit 2 month highs. EURUSD has fallen four weeks in a row and has found support at the 50-week moving average, currently at 1.1090, with 1.1060 as key support.

Overnight, the appetite for risk continued as a Japanese official said that the expected sales tax hike would be delayed for 2 ½ years, sending equity markets higher with the Nikkei up 1.4% and USDJPY to 1 month highs, breaching the 111-figure. Better than expected Japanese Retail Sales supported the scenario. Technically, the pair is testing the upper band of the Ichimoku Cloud, where a close above would give scope for a test of 111.80/90-area.

USDJPY Daily

20160530 USDJPY.Daily

Today, we expect markets to stick to bidding the US dollar higher, but we expect a rangy market as the UK is closed for Memorial Day and we have a heavy calendar this week. This morning, French GDP for Q1 came out a tad higher than expected and Spanish CPI as expected. At 11CET, we expect some volatility in EUR-pairs as a string of sentiment indicators are released, expected overall with a positive bias. German preliminary CPI should be observed at 14CET and from Canada at 1430CET, the IPPI and RMPI will be released.

Later in the week, keep an eye out for:

Tuesday: E-Z CPI, CA GDP, US Consumer Confidence

Wednesday: AU GDP, CH Manufacturing PMIs, GE Manufacturing PMI, UK Manufacturing PMI, US ADP, ISM Manufacturing PMI

Thursday: AU Retail Sales, UK Construction PMI, E-Z Interest rate announcement

Friday: UK Services PMI, US Nonfarm Payrolls

20160530 - T1TB

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