The Buck Is Back, Improvement Comes After Yellen's Speech

Market Drivers May 26, 2015
USD/JPY hits fresh multi year highs
EUR/USD takes out 1.0900 as Greece weighs
Nikkei 0.12% Europe -0.63%
Oil $60/bbl
Gold $1197/oz.

Europe and Asia:
NZD Trade Balance 123M vs. 98M

North America:
USD Durable Goods 8:30
USD New Homes Sales 10:00
USD CB Consumer Confidence 10:00

The dollar stages a relentless rally on the first full trading day of the week as markets returned from holidays in US and Europe to see USD/JPY soar to fresh multi year highs above the 122.00 level.

Sentiment towards the buck improved markedly in the wake of Janet Yellen's speech on Friday in which she stated that interest rates are likely to rise this year if US economic growth pick up in line with Fed expectations. The market took her words to mean that the Fed is committed to a path towards normalization and that a hike in the Fed Funds rate is now just a matter of when rather than a question of if. The news has propelled USD/JPY to an overnight high of 122.87 after the pair took out the stops at the previous yearly high of 122.03 and went on a near vertical rise towards the 123.00 handle.

Dollar strength however was not contained to USD/JPY only as the buck rose across the board with EUR/USD falling through the 1.0900 figure while GBP/USD dipped below 1.5400. The weakness in those pairs was exacerbated by internal factors as EUR continued to struggle with concerns over Greece while cable was still smarting from release from a secret BOE plan on the economic fallout of possible Brexit.

Overall, it appears that after several week of counter trend rallies the buck is back, but investor sentiment could turn on a dime if US data proves to a be disappointment. The Fed's path towards normalization is totally contingent on a strong US recovery in the second half fo this year characterized by a healthy pick up in consumer spending and consistent uptick in wage growth.

So far that scenario has failed to materialize as the rebound from the weather related slowdown in Q1 has been tepid at best. Today's Durable Goods orders as well as consumer confidence and new homes data should provide a series of data points on which to judge Ms. Yellen's optimism. If the numbers disappoint indicating that US economy has yet to reach "escape velocity" much of today's early morning rally could quickly reverse and spur a short covering fueled rally in both euro and cable as the day proceeds.