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Key levels were broken all around with EUR/USD testing 1.05, USD/JPY hitting 114.50, GBP/USD cracking 1.2300 and AUD/USD breaking below 76 cents. These big moves give traders a taste of the volatility that they can expect this month as there are a number of high profile events in March that could shake the financial markets. This coming week for example we have the European Central Bank’s monetary policy announcement and the U.S. non-farm payrolls report. The following week is the FOMC meeting, press conference from Janet Yellen, the Dutch elections and the G20 Finance Ministers / Central Bankers meeting. Of course we can’t forget that U.K. Prime Minister May plans to trigger Article 50 by the end of the month. Each of these events could trigger big moves in currencies but with so much happening over the next 20 trading days, March will certainly be an exciting month.
The question that we are being asked the most right now is what could derail the dollar’s rally. We have seen how sentiment can change dramatically in just 5 days with the market going from doubting a U.S. rate hike in March to pricing one in almost completely. According to Fed fund futures, the odds of a rate hike this month sits at 90%, up significantly from 40% the week prior. Sentiment could also swing the other way if this week’s non-farm payrolls report is abysmal or between now and March 15th, stocks crash. Of course both of these scenarios are unlikely because while market expectations have changed recently, underlying fundamentals have not.
The U.S. economy is improving, the labour market is strong and Federal Reserve officials have taken every opportunity to say that rate hikes are coming soon. This was the backdrop 2 weeks ago and remains the backdrop today. The difference is that the bulls are finally listening to the cohesiveness of Fed officials who have been saying all along (doves and hawks) that conditions are prime for tightening. The manufacturing and service sectors are humming along and if this week’s U.S. labour market report is satisfactory, a quarter point hike this month is almost certain. Fed Chair Janet Yellen said on Friday that a March hike is appropriate if the economy evolves as expected. Vice Chair Fischer said almost no indicator has come in badly and if there’s a conscious effort on rate expectations, he said he will join it – which basically means if everyone is in favour of a March hike, he’ll vote for it as well.