Dollar Bulls Despair as March Fed Hike Looks Like It's Baked In

(Bloomberg) -- Federal Reserve Chair Janet Yellen's remarks Friday all but confirmed what traders rushed to price in last week: a rate hike mid-month is close to a lock.

The heightened confidence about March may actually spell trouble for dollar bulls in coming days -- there's little in the way of fresh incentives to buy more of the U.S. currency right away, after it surged to an almost six-week high last week. Fed speakers are now in a blackout period until their March 14-15 meeting, and for major economic data, traders have to wait for February jobs figures to be released March 10.

“A further adjustment of the federal funds rate would likely be appropriate” in March if employment and inflation continue to evolve as expected, Yellen said in the text of a speech Friday in Chicago. She also said the removal of accommodation is unlikely to be as slow as the past couple years, when the Fed hiked by a quarter-point in two consecutive Decembers.

But for market participants, that may not have been hawkish enough. After her remarks, futures indicate traders actually saw less of a chance that the Fed will achieve its projected pace of three hikes in 2017. The Bloomberg dollar index sank to the day's lowest levels after her appearance. It dropped 0.7 percent, its worst day since January. It also stalled at its 55-day moving average, dropping back to a support level at its 100-day average.

There's another potentially ominous sign for investors hoping the dollar will regain momentum. A form of technical analysis known as the Ichimoku Cloud suggests a reversal may be looming.

The chart above shows the Ichimoku pattern for the dollar-yen exchange rate. The pair's cloud pattern, highlighted in blue, is coming to a narrow point. A thinning cloud signals a weak trend and a potential reversal, which may pose a risk to the dollar rally.

The analysis also shows the cloud pattern gets wider after the March Fed meeting, indicating the next trend will be more sustained after it passes the narrowest point, known as the inflection point -- potentially rising toward 115.10 yen or falling toward 113.22.

At least one bank ratcheted down its dollar-yen forecast Friday.

Beyond pricing in a March hike, money markets would need to anticipate a much steeper pace of tightening for 2018 to drive the currency pair higher, Adam Cole, head of global foreign-exchange strategy in London at Royal Bank of Canada, wrote in a note.

He forecast the dollar at 100 yen in 12 months, from about 114 at the end of last week, and from a previous prediction of 105 yen.

--With assistance from Dennis Pettit

To contact the reporter on this story: Vincent Cignarella in New York at vcignarella1@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum, Dave Liedtka