US Dollar rallies as Yellen keeps March rate hike hopes alive
11/Feb/2016 • Currency Updates•
The US Dollar strengthened on Wednesday, recovering some of its recent losses against its major peers after comments from Federal Reserve Chair Janet Yellen kept open the possibility of a US rate hike at the upcoming FOMC meetings.
Speaking in front of Congress in Capitol Hill yesterday, Yellen’s remarks suggested that the US central bank had not taken a March rate hike off the table, although she remained fairly noncommittal on the timing of the next rate increase.
Yellen claimed financial conditions in the US have become less supportive for growth and, if the recent market turmoil were to persist, could weigh on economic activity and the labour market. Economic conditions are expected to continue to warrant only gradual rate increases, although this remains highly data-dependent.
The US Dollar subsequently strengthened by 0.3% against its major counterparts, which is unsurprising given how low expectations for an interest rate hike are now. The market is pricing in less than a single hike in 2016, far too few in our opinion.
Earlier in the day, Sterling overlooked another set of fairly dismal industrial and manufacturing output figures, ending its run of declines against the Euro, which has seen the Pound fall to a thirteen month trough against the single currency.
Economic uncertainty in global markets is making it difficult for UK firms to determine a feasible budget rate and competitively price their goods and services. Many businesses are reassessing their currency exposure in line with these developments and investigating risk management strategies to protect their margins during the volatility.
Focus today will remain on Yellen, who will be speaking for the second day in front of Congress.
Major currencies in detail:
Despite a string of disappointing economic data, the Pound ended unchanged versus the Dollar and 0.7% higher versus the Euro.
Dismal industrial production figures in December ensured that output in the sector shrank in 2015. Warm winter weather forced a sharp decline in energy output, causing production to fall by 1.1% on an annualised basis in the final month of the year, well below expectations.
Similarly disappointing was manufacturing production, which accounts for 10% of overall GDP, declining by 1.7% compared to the previous year, a sizable 6.5% below pre-financial crisis levels. The recent depreciation of the Pound, however, suggests that this trend may be short lived.
This apparent slowdown was reflected in the latest GDP estimate from NIESR, which suggested that economic growth in the three months to January slowed to 0.4%.
The Euro’s recent run of gains came to an end yesterday, with the single currency finishing 0.5% down against the US Dollar.
Weak industrial production figures in the Eurozone on Wednesday provided further evidence that Euro-area economic growth likely slowed in the final quarter of last year. Industrial output in France and Italy both declined sharply by 1.6% and 1.0% respectively on an annualised basis, adding to growing concerns that slowing global demand and financial market jitters are having a negative effect on the health of the Eurozone economy.
The Eurogroup is meeting today, although this is unlikely have any significant ramifications for the Euro. Attention will instead turn to Friday morning’s growth figures, which are expected to show that the economy failed to grow at all in the fourth quarter of 2015.
Yellen’s comments yesterday revealed little new information, reiterating many of the same themes highlighted following the latest FOMC meeting in January.
The Fed clearly remains cautious given falling stock markets and uncertainty over China, which could dent US growth and prevent the central bank from hiking interest rates as frequently as anticipated. The recent encouraging signs in inflation are expected to continue, with price growth to move up over time.
Yellen also reiterated the Federal Reserve’s commitment to tightening monetary policy, brushing off claims rates would need to be cut amid a worsening global economic backdrop.
No major economic data releases today means focus during trading will again be on Yellen who speaks at 3:00pm UK time. Retail sales on Friday afternoon will be a key gauge on how well the US economy is performing and could prove to be a big market mover to end the week.
Rest of the world
Sweden’s Riksbank announced this morning it was cutting its interest rate further into negative territory. Rates were slashed by 15 basis points to -0.5% from -0.35% amid persistently weak inflation.
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