Dollar trend dependent on Yellen testimony

8 February,, Lagos – The week ended in some extreme volatility with the Australian dollar dropping across the board. The currency recorded its largest single day drop against the US dollar in six months. The greenback on the other hand rallied after unemployment rate came at 4.9%, an 8-year low. While the non-farm payroll report showed 151,000 jobs added.

The drop in the hiring figure largely reflects the usual drop after seasonal hiring pickup in the final two months of the year. Hourly earnings also advanced more than forecast following a rise to its highest since July 2009.

Speaking of jobs reports, last week the New Zealand unemployment rate fell to its lowest point since March 2009, coming in at 5.3%, much lower that the 6.1% expected. Although it is worth noting that the labour force participation rate fell for a third consecutive quarter. The employment change also showed 0.9% change, while the annual wage inflation came at the lowest since March 2010.

UK’s official monetary policy bank rates vote showed a shift, as none of the members backed rate hike. Ian McCafferty who was the lone dissenter has now joined the rest of his counterparts in voting for no interest rate hikes, as the Bank of England (BOE) cut its forecasts for growth, wages and inflation.

The week ahead

Compared to last week we have a relatively quiet week in terms of fundamental releases. Asian markets will be missing from the picture as the country goes on a week-long break in celebration of the commencement of the lunar new year. However, markets will be looking forward to Yellen’s testimony on Wednesday, a report which is likely to drive the dollar even further.

UK Manufacturing Production m/m

UK’s Manufacturing Production m/m is due for release on Wednesday. The figure is now expected to show 0.0% change in the total inflation-adjusted value of output produced by manufacturers. This is a potential development from -0.4% recorded last month. The sterling is presently mixed against its major pairs and would be looking for a catalyst to send it into a clearer trend.

Yellen testifies

Federal Reserve Chairman, Janet Yellen will be the high point of the week as she has dual testimonies. On Wednesday, she is due to testify on the Semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC. And due to testify on the Semiannual Monetary Policy Report before the Senate Banking Committee on Thursday. After the jobs report on Friday, and the subsequent strengthening of the dollar, Yellen’s testimony this week will be a more concrete decider of the fate of the greenback in the near term. On Thursday we also have the unemployment claims due for release.

Also important, we have the US Core Retail Sales m/m and retail sales figures due for release on Friday. They are forecast to come at 0.0% and 0.1% respectively. In the previous report, the change in the total value of sales at the retail level was -0.1%, while the figure excluding automobiles also came at -0.1%. Sales at U.S. retailers dipped in December, wrapping up the weakest year since 2009. This raised concerns about the momentum in consumer spending heading into 2016 as consumers seemed to opt for savings of amount accrued from cheaper fuel, rather than spending. The retail sales figures are now expected for a slight pickup, coming into the new year.

Lastly for the dollar, we have the Prelim UoM Consumer Sentiment. Being a leading indicator of financial confidence, as consumer spending accounts for a majority of the overall economic activity, this data will be closely watched alongside the retail sales figure. The dollar may be in for further strengthening this week after gaining ground on Friday, following the impressive unemployment rate.

ECOFIN Meetings

From Europe, we have the European council financial minister’s meeting, where we expect discussions about the euro support mechanisms and government finances. The German Prelim GDP q/q is also due on Friday, forecast to come at 0.3%.

In conclusion of this week’s fundamental calendar and expectations, the dollar is likely to be the major focus as we have Yellen’s testimony, along with other high impact reports which could determine the dollar trend.

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