Friday proved to be a rather uncomfortable end to the week for most markets, with increased nervousness regarding Fed policy resulting in losses in equities, a sell-off in bonds and a sharp increase in implied volatility in both equities and also FX. Once again, there appears to be a fight in play, between a Fed keen to raise interest rates and a market far more sceptical of it happening. Currently, the market places a 30% probability of the Fed putting up rates next week. Today sees the final speech from a Fed official before the meeting, with Brainard due to speak early during the European meeting. Traditionally, she’s perceived to be on the dovish side, but there is some thinking among Fed watchers that she could be used to shift market thinking more towards a tightening. So there are volatility risks on the dollar later today.
For now, the dollar is starting the week on a slightly softer footing and more so against the yen, with talk in some quarters of the BoJ moving away from ‘shock tactics’ of the past. Equities followed through on the Friday session’s weakness during the Asia session, with that also being reflected during the European session. We’re likely to be in a waiting game ahead of the Fed speech later today, with nothing major on the data calendar to provide a distraction before Brainard’s speech at 17:15 GMT.