Yellen Dials Up Dollar

Janet Yellen made sure a March rate hike is on the table in the first day of her Humphrey Hawkins testimony. The Australian dollar was the top performer while the pound lagged. Australian vehicle sales highlight a light calendar later. Today's video below (for Premium subscribers) tackles the existing trades as well as the likely upcoming trades and the rational behind him. 2 remaining USD longs are in  progress.

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Yellen stayed clear of focusing on any date but highlighted that rate hikes (plural) are expected this year so long as the economy stays on track. What was notable is that she said those forecasts don't incorporate possible fiscal changes, so there are potential upside risks.

Looking at Fed funds implied probabilities, March ticked to 34% from 24% a week ago but most of the move came before the testimony as the market remains enamoured with Trump's tax plan. We may get more details tomorrow when Trump will meet with retail executives to talk about taxes and imports.

It won't take much more than the mention of the words “tax plan” to keep the rally going in the S&P 500. The index initially slid on Yellen but reversed to finish 9 points higher in the fifth consecutive day of gains.

The US dollar gained 50-100 pips across the board on the Yellen headlines but gave back a solid portion later, especially against the commodity currencies. That reflects the waning focus on the Fed and laser-focus on the White House. We will be watching the US Treasury extra closely in the days ahead after Secretary Mnuchin was confirmed yesterday.

The WSJ had a story about a potential Commerce Dept change that would allow US companies to claim unfair subsidies for weak currencies. It's preliminary and would cause trouble at the WTO but at the very least it's strong evidence that Trump will take FX action one way or another.

The Asia-Pacific calendar is light in the session ahead. The lone indicator to watch is the Aussie January report on new vehicle sales. The prior reading was +0.2% y/y. Tough to see that one moving the market.