FX Update: Yellen comments create mere ripples in FX FX Update: Yellen comments create mere ripples in FX FX Update: Yellen comments create mere ripples in FX

FX Update: Yellen comments create mere ripples in FX

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  US Treasury Secretary Yellen yesterday committed a major faux pas in mentioning interest rate hikes in a speech, comments that she later softened with clarifications about Fed independence. The reaction across markets was telling, with currencies least impacted even as equities gyrated rather violently, perhaps as forward Fed expectations hardly moved a jot in either direction on this development.

FX Trading focus: Yellen prompts round circle of revulsion and recovery in risky assets.

Risk-correlated FX politely nodded its head at the rather sharp reaction in risk sentiment to Yellen  committing the faux pas of mentioning the possible need to hike rates to prevent the US economy from overheating. But the damage was rather limited and most FX action retreated back to where it came from on her later “clarification” that she was neither predicting or encouraging rate hikes and vowing support for Fed independence. The episode showed an alarming cluelessness by the former Fed Chair in ever uttering such a thing, but also suggests that the Biden administration probably has inflationary pressure very much on its radar screen. One of the reasons I suspect FX failed to wring much of a reaction out the situation was that forward Fed expectations hardly moved a tick in either direction in yesterday’s trading, if we take something like the September ’22 EuroDollar STIR as our barometer. (the contract pointing to the market approximately pricing a Fed rate hike some time in the late Q3 to Q4 of next year time frame). The long end of the US yield curve reacted fairly sharply, but also returned to more or less unchanged on the day.

So what is the market for its next move? In yesterday’s rather long piece, I argued that any notable move in risk sentiment lower would likely prove a stronger driver than any considerations linked to recent central bank moves or perceive guidance shifts, as in the case of this week’s RBA. But the reaction function yesterday felt rather weak, and if sentiment continues to bounce back with US longer yields kept more or less range-bound, the USD could be set for a test of cycle lows sooner rather than later. (Important caveats on strong US data today and through Friday’s US employment data below).

Note crude prices marching back toward the cycle highs – a strong coincident indicator for USD bulls – driving EURNOK back below 10.00 for the fourth time since the end of March of April and commodity currencies champing at the bit against the suddenly prone US dollar by European lunch-time today. The next step is today’s important US ISM Services and how the US treasury market treats negative or positive surprises (the flash Markit surveys failed to predict the downward shift in Manufacturing, while the record high March Services reading was exceeded in the flash April number). The April ADP private payrolls change is also out. Strong data doesn’t have to be USD positive if US long yield rises are slow relative to the elsewhere and if Fed expectations don’t shift much, though probably are JPY-negative. Weak US data is likely most interesting for potential JPY support if yields drop again, while it is only USD positive if risk sentiment comes in for another round of deleveraging.

GBPUSD is an interesting one to watch ahead of tomorrow’s Bank of England meeting and Scottish election after the pair failed to wobble much over the episode of wobbly risk sentiment yesterday. The yield spread move at the front of the curve favours sterling, as the UK-US 2-year spread is at new highs for the cycle near +4 basis points. The technical situation is very rangebound, but if the BoE stretches its time frame for QE and delivers a more upbeat forecast tomorrow in a backdrop of stable to improving risk sentiment (the most important ingredient after the mini-spike in volatility yesterday) GBPUSD has the fundamental support to burst above 1.4000 for another go at the top. Longer term, the Scottish referendum issue could present a notable hurdle longer term if a the Scottish demand another vote down the road.

Source: Saxo Group

Firm kiwi post-FSR and Q1 employment data
Last night it was the Reserve Bank of New Zealand’s turn to possibly make a splash with comments in the semi-annual Financial Stability Report, but the language was rather watered down, as the Deputy Governor indicated that measures already taken by the government as well as increased building and slower population growth are likely to soften the risks to financial stability from housing. In testimony before a parliamentary committee was this kind of platitude: “not a flashing red alert, but it is a concern, and what we are expressing is a desire to see some stabilization”. Yawn. The kiwi is generally firmer on a much stronger than expected employment change number overnight and the unemployment rate drop. The 1.0750-00 area looks important as a last-ditch support zone for AUDNZD, structurally speaking.

Table: FX Board of G-10+CNH trend evolution and strength
Canada offers us the strongest trend reading as it has hardly faltered recently. Bank of Canada Governor Macklem is out testifying late today before lawmakers, it should be noted. Elsewhere, the USD has tried turning higher again, but is still some way from breaking anything in any key pair (besides interacting with psychological 1.2000 level in EURUSD).

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Here – note that the AUDNZD attempt to turn positive yesterday failed, while EURGBP is trying to turn down today ahead of the BoE meeting tomorrow. USDSEK is trying to turn higher on pronounced SEK weakness as EURUSD has tested back toward 1.2000 (and SEK is under the strong NOK’s thumb again today), but if EURUSD is finding support, that will have a hard time blossoming.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1215 – US Apr. ADP Employment Change
  • 1330 – US Fed’s Evans (Voter) to Speak
  • 1345 – US Final Apr. Services PMI
  • 1400 – US Apr. ISM Services
  • 1400 – ECB Chief Economist Lane to Speak
  • 1430 – US Weekly DoE Crude Oil and Product Inventories
  • 1500 – US Fed’s Rosengren (Non-voter) to speak
  • 1600 – US Fed’s Mester (Non-voter) to speak
  • 2130 – Brazil Selic Rate
  • 2230 – Bank of Canada Governor Macklem testimony
  • 0100 – New Zealand May ANZ Business Confidence survey


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.