Just after US lunchtime, two key members of the Federal Open Market Committee are set to take the stage and offer up their views on the US economy. These sorts of events will generally create considerable volatility in the markets, and in the strength of the USD versus its major counterparts. Here’s a look at why.
In short, it all comes down to interest rates. The US base rate is a hot topic at present, with Fed Chair Janet Yellen suggesting a rate hike could come as soon as November this year. A rate hike would undoubtedly boost the strength of the USD dollar, at least in the medium term, but could also pare the US economic recovery.
For this reason, the traders’ and investors’ reaction to the tones of the speeches will depend on their perspective. Forex traders will look to a hawkish tone to drive US dollar strength. Conversely, stock markets and investors will be hoping for a dovish tone to suggest a delay in any potential hike.
Recent fundamental releases suggest a dovish tone may be the order of the day, with manufacturing data, trade balance figures, initial jobless claims and nonfarm payrolls all missing expectations last week.
Look for a reaction in the price of gold to indicate a medium term bias. If either speech points to an earlier than expected hike, or the quickening of monetary policy tightening, capital will flow out of gold towards the US dollar. The selloff will reduce the value of gold, with likely support at previous swing around 1,305.13. Conversely, if either speaker hints that the US central bank may hold off on its monetary policy tightening, capital will flow towards the yellow metal and boost the price of gold. Look for a break of intraday highs at 1,313.74 to validate a bullish bias.
To contact the reporter of this story; Samuel Rae at Samuel@forexminute.com