Forex today: Yellen dominated; price reactions shows that markets are not convinced

Forex today was dominated by Yellen's speech while otherwise, traders look to tomorrow's (Wednesday NY time) announcement of tax cut details.

The dollar was firmer, +0.4% (fiscal stimulus is the theme) and was sent to fresh highs in a month above the 40 DMA for the first time since April on the back of a mixed bag from Fed Chairwoman Yellen, (despite the apparent failure of the healthcare bill).

There was something for both bulls and bears around the US economy in Yellen's speech. In terms of monetary policy, the Hawks would have agreed with her concerns that inflation could overrun and leave the Fed behind the curve if the Fed is too slow in the pace of interest rate hikes and subsequent timings. The Doves would have agreed that no one can be sure that the low inflation of late is not just transitory.

The US 10yr yield benchmark rose from 2.21% to 2.25% ahead of Yellen’s speech while the Fed fund futures yields firmed, to price the odds of a December rate hike at 76% (from 71%), noted analysts at Westpac who also explained that Yellen’s speech was mixed, and noted that yields fell 2bp afterwards.

EUR/USD was pulled down again on the German election results from the weekend while there was little evidence that the European bond markets are anticipating ECB policy change after Draghi's dovish remarks yesterday. EUR/USD has broken below a key technical level at 1.1830 and the doors are open to the downside below the 1.17 handle for the August low at 1.1662 as the next technical target. 

USD/JPY, +0.48% at 112.25, regained the 200 DMA, below the trend resistance at 112.80-90. GBP/USD was dragged into the negative EUR flows but faired better than its European counterpart, down just -0.07% for the day to 1.3455; EUR/GBP down -0.41% to 0.8761 from o/n 0.8801 level. 

Metals were down again with futures CFD's copper -0.52%, Gold -1.09%, (spot below $1,300 again $1,291.81 the low), although Iron Ore 62% Fe CFR was up by +0.44%; However, that failed to support the major commodity currency. AUD was closing - 0.64% as N.Korean risk continue to weigh on the higher betas in the Pacific region while China was recently downgraded by the S&P. Kiwi was an even worse performer, -0.91%. CAD +0.17% vs the dollar with WTI bid between a range of $51.50-52.58bbls.

No key events scheduled ahead in Asia for today

Key notes from US session 

• US New Home Sales decline in August - Wells Fargo
• US Consumer Confidence: Hurricanes weigh on data in September - Wells Fargo
• US Aide: US Senate Will Not Vote On Graham Cassidy Health Bill
• Where now for Federal Reserve policy? - ING
• Gold dropped heavily on Yellen, back below $1,300 level
• Fed's Yellen: Currently not considering changing inflation target
• Fed's Bostic: Open-minded about December rate increase