The focus shifts in the week ahead from Yellen’s testimony and disappointing data to the ECB meeting which is expected to result in a further modest adjustment in its risk assessment. While the focus shifts, the pressure on the dollar will likely remain. It fell to new lows for the year last week against the euro, sterling, Swedish krona, and the Canadian and Australian dollars, among the majors.
Among the emerging market currencies, the dollar fell to new lows for the year against the central European currencies (forint, zloty, and koruna) as well as the Singapore dollar and Mexican peso, among the actively traded emerging markets. The dollar recorded its lowest close for the year against the Chinese yuan ahead of the weekend.
The markets have doubted the Fed’s commitment to raising interest rates since the start of the year. Perhaps it reflected, in part, the disappointment after the dot plots had suggested four hikes in 2016, only one was delivered. The markets were skeptical of the March hike until officials launched a full court press to convince it otherwise. Officials needed less of a campaign about the June hike. It is a possible third hike this year that the market is now skeptical
On June 15, a day after the last FOMC meeting, the September Fed funds futures contract implied about an 18% chance of a hike, according to the CME. It had fallen a little below 10% before the retail sales and CPI reports before the weekend. There is now almost an 8% chance of a hike priced into the September futures contracts.
The market is skeptical of a December move but less so than after the June hike. A month ago, the market had discounted about a 41% chance of a hike. The pricing implied a 47% chance before pre-weekend data, which spurred a reassessment that brought the odds down to almost 43%.