U.S. Fed Chair Janet Yellen’s testimony on the U.S. economy to the Joint Economic Committee yesterday set the stage for a rate hike in December, noted Scotiabank in a research report. The Fed Funds Futures shows possibility of a December rate rise has increased to 96 percent as of 17 November. Yellen’s testimony underlined that a rate hike might “become appropriate relatively soon” as data are signalling towards strengthening inflation and continued progress in the labor market. It also highlighted that the pace of further hikes would be gradual.

When there is much better clarity regarding the economic policies that might be put into effect, the FOMC would have to factor in those assessments on their effect on inflation and employment and possibly adjust its outlook. Yellen’s testimony also noted that the central bank’s independence is critically significant and that Yellen intends to serve her full term as Fed Chair, which is until 3 February 2018.

Global FX markets would be continue to be driven by Donald Trump’s populist and protectionist stances as Janet Yellen affirmed that the central bank would assess the effect of Trump’s economic policies when there is larger clarity and adjust monetary  policy outlook, noted Scotiabank.

Yellen’s comments and remarks are expected to be supportive of the dollar in the coming months. Apart from divergent monetary policies that would firm the dollar strength, any risk-aversion possibly coming from the following events would spur demand for safe-haven currencies such as the JPY and USD, according to Scotiabank. The events include Dutch general election, Italy’s constitutional referendum, French presidential election, U.K. PM Teresa May triggering Article 50 by the end of March 2017 and German federal election.

Meanwhile, yesterday, the Bank of Mexico hiked its benchmark lending rate to 5.35 percent in an attempt to defend the Mexican peso. The central bank stated that it is prepared to take additional action if required. In the EM Asia space, the Bank Indonesia is expected to follow suit.

“We would buy the USD against a basket of KRW, MYR and SGD with equal weightings despite near-term risks of technical corrections, targeting a 5 percent gain before Trump unveils his economic policies in detail”, added Scotiabank.