Risk off dominates ahead of a busy economic calendar

Risk off sentiment is expected to remain the dominating theme throughout the morning, with investors reluctant to make any major moves ahead of another flurry of economic data and a key testimony by Federal Reserve Chair Janet Yellen before Congress.

This will be the first time that Janet Yellen’s will be in the hot seat since Trump clinched the Whitehouse victory so the event is set to be very politically charged, so much so that it is unclear how much useful information we are actually going to be able to walk away with.

Janet Yellen in the hot seat

Yellen is expected to be asked about President elect Donald Trump’s plans for the biggest overhaul to tax reforms in three decades and regarding his plans for a heavy spending spree on infrastructure when he enters the Whitehouse. This is the first debate on public policy for 2017 – the Republicans will be spurred on by their win and the fact that they are now at the helm, whereas the Democrats will be using this opportunity to pick apart Trump’s economic plans. Yellen will need to be at her best, as she is expected to be pressed from both sides.

December rate hike probability nears 100%

Aside from in depth discussions regarding Trumps plans, the market will also be looking to hear a clear signal from the Fed regarding a December rate hike; currently a 90% chance of an increase to interest rates in December is being priced in so clarification here would put the topic to rest and any clues regarding the outlook for next year in terms of rate hikes and inflation being faster and higher than previously assumed could put fresh legs on the dollar’s recent rally.

The dollar, which is trading close to a 13-year high is currently trading down 0.2% against a basket of currencies, whilst the CBOE volatility index (VIX), often regarded as a fear gauge has advanced 2% confirming the risk-off broader market profile as investors prepare themselves for the action packed day.

Team Trump appointments could still unnerve the market

This debate will capture a lot of attention as the markets have been heavily focused on what Trump intends to do once he takes the reins. However, let’s not forget that another key aspect here is who he surrounds himself with – who will be on team Trump? Any signs going forward of appointments of key players that want to curb the Fed’s authority could send shivers through not only the Federal Reserve but also the markets, encouraging a flight into safe-haven assets.

US inflation data to support the hike?

In addition to the highly anticipated appearance by Yellen we also have the release of consumer price index, weekly jobless claims, housing data and the Philliy Fed Index. The markets will be looking at this data to reinforce expectations of the Federal Reserve hiking rates in December, so in line figures here would confirm the long-term uptrend of the dollar. Given that weaker than expected reads in the previous session on US producer prices and industrial production had little impact on the dollar, the greenback could well take a weaker print in today’s data in its stride.