Euro, Yen May Rise if Fed Comments Rekindle 2015 Rate Hike Bets

Talking Points:

Euro, Yen May Rise if Fed Comments Rekindle 2015 Interest Rate Hike Bets
Aussie Dollar Gains as RBA Keeps Cash Rate at 2%, Maintains Neutral Bias
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A relatively quiet economic calendar in European trading hours is likely to see investors looking ahead to Fed-speak for new direction cues. Commentary from Kansas City Fed President Esther George and San Francisco Fed President John Williams is on the docket.

Ms George has tended to fall on the hawkish side of the spectrum but she does not vote on the rate-setting FOMC committee until next year. On the other hand, Mr Williams will take active part at the two policy decisions still on tap for 2015. Furthermore, he is something of a protégé for Janet Yellen, suggesting his views are closely aligned with that of the Fed Chair.

With that in mind, Williams’ remarks should take top billing as traders gauge whether his recently hawkish rhetoric has survived last week’s deeply disappointing US employment figures. If so, it will be curious to see if sentiment trends prove responsive.

Trading dynamics following the September’s payrolls figures hint that comments reiterating the call for a 2015 rate hike may weigh on risk appetite. Such a scenario seems likely to generate gains for funding currencies like the Euro and the Japanese Yen at the expense of higher-yielding alternatives including the Australian, Canadian and New Zealand Dollars.

The Aussie outperformed in overnight trade after the RBA kept its lending rate unchanged at 2 percent. While the outcome was widely expected, traders seemed to have been looking for a dovish lean in the accompanying commentary (indeed, we outlined the reasons for such a possibility in our weekly forecast). Governor Glenn Stevens offered no such clues however, falling back on now-familiar neutral language.

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