Dollar Strengthens as Yellen Turns Hawkish

August 30, 2016

Janet Yellen statement in Jackson Hole last Friday has led to a dramatic move in the dollar. The dollar index reached the biggest intra-day rally of 1.48% since 24th June.

The dollar surged as Yellen said ‘the economy is nearing the Fed’s goals of full employment and stable prices. In light of the continued solid performance of the labour market and our outlook for economic activity and inflation. I believe the case for an increase in the federal funds rate has strengthened in recent months.’

Although she didn’t give a clear hint of the timing of a rate hike, she described a bright economic outlook and increased possibility of a rate hike by the end of the year, leading to the dollar strengthened across the board.

Before Yellen’s speech, the market expected only 15% chance of a rate hike in September, and 46% chance in December. After the speech, the chance of a rate hike in September has rose to 42%, and 65% in December respectively. Whether there will be a rate hike in September may depend on the upcoming Non-Farm Payroll and Unemployment Rate figures for August, to be released at 12:30 GMT on this Friday 02 September.

On the 4 hourly chart of the dollar index (DXY), the major resistances of 94.73 and 95.00 were both broken by a long bullish candle on Friday. It further broke the next resistance of the 38.2% Fibonacci retracement level at 95.40 and hit a two-week high of 95.80 then held. The resistance level is at 95.80, followed by 96.00 and 96.23. The newly formed support level is at 95.56, followed by 95.40. The daily KD indicator is above 80, suggesting a retracement.

All the other major currencies have weakened significantly against the dollar since the speech. EURUSD broke the downside uptrend channel support and held above the 50% Fibonacci retracement level at 1.1157. GBPUSD broke the support level at 1.3160 and rebounded after touching the support line at 1.3050. AUDUSD broke the downtrend line support. USDJPY broke the consolidation pattern by a long bullish candle, then further broke the two major resistances at 101.00 and 102.00. USDCAD broke the major uptrend line resistance and the significant resistance level at 1.3000.

Keep an eye on the German CPI (YoY and MoM) for August, to be released at 12:00 GMT, and the US Consumer Confidence for August, to be released at 14:00 GMT on 30th August.

We will get a series of important economic figures out of the Eurozone on Wed 31 August. The German Unemployment Rate and German Unemployment Change, to be released at 07:55 GMT. Also Eurozone CPI and Core CPI (YoY) for August, to be released at 09:00 GMT, as it will influence the trend of the DAX index and the strength of the euro.

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