Sentiment towards the US economy was elevated on Friday following the hawkish comments from Janet Yellen, which bolstered expectations over the Federal Reserve raising US rates in 2016.
Investors were gifted the clarity long sought when Yellen suggested that the case for raising US rates had strengthened in recent months consequently uplifting the Dollar. For an extended period, domestic data from the States has followed a positive path while the easing Brexit anxieties continue to provide some leeway for the central bank to take action.
While there have been ongoing talks of September being a live meeting to raise US rates, it seems likely that the Fed waits for further positive domestic data to justify raising US interest rates in December. With the Jackson Hole meeting dispelling the period of uncertainty, the Dollar could trade higher as bets mount over the Fed breaking this tradition of central bank caution. Focus may be directed towards the pending all-important U.S non-farm payrolls report this week which if exceeds expectations could provide another compelling reason for the Fed to act.
The Dollar Index surged with ferocity on Friday following Yellen’s comments which renewed hopes of the Fed pushing the button. Although prices are currently in the boundaries of still being bearish on the daily timeframe, a breakout above 96.00 could entice bulls to send prices higher.
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Global stocks still pressured
Stock markets were vulnerable to losses last week as the combination of Dollar strength and renewed hopes over the Fed raising US rates enticed sellers to install repeated rounds of selling. Asian markets have already started Monday on a shaky footing and this could trickle into European markets later today. Although the period of uncertainty over when the Fed may raise rates has been dispelled, the persistent concerns over the global economy and depressed oil prices could ensure stocks remain depressed moving forward. With the attributes of a bear trend still visible, it could take an unexpected catalyst to trigger a heavy selloff in global stocks.
Commodity spotlight – Gold
Gold violently vibrated between losses and gains on Friday before sinking lower following Janet Yellen’s hawkish comments which heightened hopes of a US rate hike this year. This metal remains extremely sensitive to US rate hike expectations and could be poised for further declines if bets mount over the Fed breaking the tradition of caution by raising rates. Even if risk aversion attempts to keep the precious metal buoyed, the viscously appreciating Dollar may simply cap further upside gains. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Bears are currently in control and a decisive break down below $1315 could open a path towards $1285.
Otunuga is a research analyst at FXTM
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