The dollar is in recovery mode on Monday after falling on Friday, recording its lowest since January 2 versus a basket of currencies and coming close to hitting a fresh 3½-month low. Dollar selling took place in the aftermath of December’s jobs report which showed the US economy adding notably fewer positions than analysts had expected.
Despite earlier declines, the dollar managed to recover, finishing Friday’s trading higher, albeit only slightly so. Dollar bulls eventually taking control was attributed to the fact that last week’s NFP report doesn’t seem to be changing perceptions among Fed policymakers, with markets continuing to in large part – more than 60% at the moment according to CME futures – pricing in a rate hike during the Federal Reserve’s March meeting. Remarks by Fed policymakers late last week also played their role, with positive momentum for the US currency carrying through Monday’s trading, as comments by FOMC policymakers were broadly tilted towards the hawkish side. The dollar index is trading in the green during Monday’s trading and at a distance to Friday’s low, touching 92.36 at its highest, a level last experienced on December 29.
In a Reuters interview over the weekend, San Francisco Fed President John Williams said that the US central bank should raise interest rates three times this year – as projected in December’s dot plot – making reference to an already strong economy that will receive a boost from lower taxes and leaving the door open for more hikes (but less tightening as well) depending on economic conditions. John Williams is a hawkish-perceived FOMC member that is holding voting rights in 2018. Later on Monday – at 1835 GMT – he is scheduled to participate in a panel discussion titled "The Options: Keep it, Tweak it, or Replace It" with "It" referring to the Fed’s 2% inflation target. Williams’ comments will be attracting attention.
Cleveland Fed President Loretta Mester, also an FOMC voting member in 2018, was typically hawkish in her comments late last week, saying she expected four rate hikes in 2018; markets are currently roughly pricing in two 25 bps interest rate hikes in 2018.
Another hawkish-perceived FOMC member, Boston Fed President Eric Rosengren, will be participating in a discussion (2125 GMT) at the same event as John Williams, the topic of which is "Next Steps: Learning from the Bank of Canada". Unlike Williams, Rosengren doesn’t hold voting rights in the FOMC in 2018; he will be a voting member next year.
Earlier on Monday – at 1740 GMT – Atlanta Fed President Raphael Bostic will be speaking on the economic outlook and monetary policy before the Rotary Club of Atlanta. Given that Bostic is holding a voting status in 2018 and being viewed as falling neither on the hawkish nor the dovish side of the spectrum, forex market participants will likely be paying attention to his comments.
The dollar ended last week with a three-day advance versus the Japanese currency, its longest streak since the end of November. Should Fed-talk continue to be on the hawkish side, the pair is expected to head higher, especially if one takes into account that the Bank of Japan seems in no hurry to begin normalizing policy, even in light of stronger growth in the world’s third largest economy. In such an event, a barrier to the upside is expected around December’s 12’s two-month high of 113.75. A successful break above it would shift focus to early November’s ten-month high of 114.72, with the area around this level encapsulating a few other peaks from the relatively recent past.
On the downside and should the greenback fail to find support from comments by Fed officials, the range around the current level of the 50-day moving average at 112.86 might act as support. Price action is at the moment taking place close to this point, with a breach turning attention to the 112.00 handle, a potential psychological level and an area of congestion in recent weeks.
In a week packed with speeches by FOMC members, Minneapolis Fed President Neel Kashari is scheduled to participate in a Q&A session on Tuesday at 1500 GMT. Him and Chicago Fed President Charles Evans, with the latter participating in a discussion on current economic conditions and monetary policy on Wednesday at 1400 GMT, were the two FOMC members voting against an interest rate increase during the Fed’s latest meeting in December. They’re both thought of as chief doves by markets and they will importantly be losing their voting rights in 2018, a factor that renders some to speculate on a more hawkish-than-currently-priced-in direction by the Fed.
Other Fed speakers making talks this week are Dallas Fed President Robert Kaplan (centrist-viewed and non-FOMC voting member in 2018), St. Louis Fed President James Bullard (viewed as a dove and holding voting rights in 2019) and New York Fed President William Dudley (centrist-perceived with the New York Fed holding permanent voting rights within the FOMC). A few months ago, Dudley announced that he will be stepping down before his 10-year term at the NY Fed expires in January 2019. Speculation on who will replace him is well underway.
Beyond Fed officials, other catalysts could drive the US currency this week: perhaps most important in terms of releases are Friday’s inflation and retail sales figures for the month of December, both due at 1330 GMT. Other data also have the capacity to drive positioning on the dollar, including tomorrow’s JOLTS job openings report for the month of November to be made public at 1500 GMT.
