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Yellen’s patience weighs on US dollar

by Ashraf Laidi

The dollar quickly lost all of the gains triggered by traders’ misinterpretation of wire news services’ reporting of Fed Chair Yellen’s testimony, erroneously stating that “guidance chance to mean liftoff possible at any meeting”. USD erased all of its gains before extending fresh losses, alongside a new record in US indices as well as the Dax and the FTSE-100 when Yellen reiterated the meaning of the Fed’s “patience” forward guidance, stating the “…FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings”

Yellen further calmed any excitement among the hawkish camp by indicating: “However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings.”

The reality remains that the Fed faces a more protracted decline in price growth. Core personal consumption expenditure index, the Fed’s preferred gauge of inflation is at a 9-month low of 1.3%.

How can the Fed be expected to raise rates in June while the core PCE continues to fall below the central bank’s preferred 2.0% target?

Another dovish boost on Thursday’s CPI

More boost for the doves will emerge upon Thursday’s release of the Jan CPI figures, expected to show -0.1%, the first decline since October 2009, following a +0.8% in December. The core rate – excluding food and energy items – is expected to match the Feb figure of +1.6%, the lowest in ten months.

Unsurprisingly, Yellen has preferred to stay away from giving any overt signals before the FOMC’s March 17-18 meeting, which is not only a 2-day meeting but followed by the Fed’s quarterly forecasts and Yellen’s post-meeting conference. Until then, USD bullishness will remain largely tempered and GBP resilience could be expected to re-affirm itself.

Sterling continues to perform all major currencies, supported by our expectation that UK inflation will begin stabilizing before its US counterpart, mainly due to diverging currency effects following the pound’s 10% decline against the US dollar from last summer’s peak. With the Bank of England already preparing markets for inflation to fall below zero temporarily, FX traders are already looking beyond this point. This may explain why UK 10-year yields rose by more than 4 basis points to 1.76% despite inflation hitting a 55—year low. In contrast, the Fed continues to describe soft inflation figures as “transitory”, without preparing markets for temporary downside surprises.

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