Traders Wait For Clues From Fed

On Monday, the dollar reached an eight-week high versus the yen, endorsed by a increase in U.S. Treasury yields, as traders focus in on the Federal Reserve meeting beginning the next day for indications on whether interest rates could hike again by the end of the year.

Last week was the greenback’s best performance against the Japanese currency since November, up 2.8 percent, as a increase in U.S. yields boosted its appeal and data displaying an increase in U.S. consumer prices helped advance expectations that the Fed could hike rates again in December.

“The market is fundamentally bullish for dollar/yen, with a combination of higher risk sentiment and higher U.S. yields,” quoted Societe Generale currency strategist Alvin Tan, adding that a holiday in Japan meant there was less yen liquidity than usual.

Investors turn their attention this week to the Fed’s meeting expected to take place on Sept. 19-20th policy meeting. The U.S. central bank is viewed likely to announce a plan to start cutting its balance sheet at the meeting, though it is broadly expected to keep interest rates the same for now.

Markets are increasing bets by more than a 50 percent chance of a Fed hike by the end of the year, though, up from only around a 40 percent chance less than a week ago, according to CME FedWatch.


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”The dollar-positive effect of the inflation data did not last long last week,“ reported Commerzbank strategists in a note. ”Even though the market sees an increasing likelihood of a rate step in December … this change of mind only refers to the most immediate Fed policy.

“The positive inflation amazement seen last week clearly is not sufficient by far to convince the market of a noteworthy continuation of the Fed rate hike cycle.”

Sterling, which was also lifted across the board last week by a shift in prospects for interest rate hikes, reached a 15-month high above $1.36 in early European trade before slipping back to around $1.3550 by 1105 GMT, prior to a speech by Bank of England Governor Mark Carney.

“Any BoE-fuelled sterling rally may be on its last legs; what we have defined as a ‘withdrawal of stimulus’ hiking cycle is now priced into the currency,” stated ING currency strategist Viraj Patel.