Market Brace for a Rate Hike in December

XM Investment Research Desk: The US dollar kept most of its gains despite some attempts of profit-taking as the market seemed to brace for a rate hike in December.  The dollar index reached its highest in 7 months at 98.15 right after the beginning of Asian trading but subsequently fell below 98 to 97.99.

Fed Chair Janet Yellen said on Friday that it would be best to let the US economy run “hot” for a while so as to repair the damage that took place during the financial crisis.  This seemed to confirm the view that the Fed’s approach to raising rates would be slow and gradual.  This could also mean that inflation would be allowed to exceed the Fed’s target for a while so that underutilized resources such as discouraged workers are tempted back into labor market.  Long-term bond yields rose (and their prices fell) following Yellen’s comments, as higher inflation could erode the real value of the future payments of such instruments.  However, despite Yellen’s promise to go slow with rate hikes, higher yields were still a positive for the US dollar.

The focus later this week will switch to the European Central Bank meeting on Thursday, where some indications could be given with respect to the scheduled end of Quantitative Easing in the Eurozone in March 2017.

The US dollar was holding above the 104 mark against the Japanese yen at 104.05 having traded as high as 104.46 on Friday.  The euro also managed to come back from today’s session lows of 1.0963 to trade at 1.0988 – although it also stayed below the psychologically important 1.10 mark.

In terms of economic data, the only figures of interest came out of Japan.  The Reuters Tankan climbed to 10 in October (compared to 5 the previous month), whereas industrial output for August was revised slightly lower to 1.3% month-on-month from 1.5%.

In commodities, oil drifted back towards the $50 level as it fell from Friday’s high around $51.10.  It was last at $50.15.  Gold was trying to continue its climb from $1250 an ounce to trade at $1254.

Looking ahead, final Eurozone inflation for September and US industrial output were the key figures that will attract attention later on.  In addition, the Fed’s Vice President Stanley Fischer will speak before the Economic Club of New York and he could give some clues as to what the Fed’s leadership (Yellen-Fischer-Dudley) thinks about the economy and monetary policy.

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