Yellen's Dovish Wrinkle Boosts Carry Trade - Why No EUR/USD Rally?
- US data at worst stretch point since Sep'12; why no EURUSD rally?
- Lower rates for a few months stokes demand for carry trade.
- See the DailyFX Economic Calendar for Thursday, February 26, 2015.
Fed Chair Yellen may have been upbeat about recent economic progress in the United States but she undoubtedly added another wrinkle of dovishness to the equation. For weeks, market participants have honed their focus around the wording "patient" in the Fed's policy statement, drawing on a lesson from the past: ahead of the Fed's June 2004 rate hike, the word "patient" was deployed to describe the Fed's stance for raising rates in the prior two meetings.
Accordingly, when Fed Chair Yellen announced in the semi-annual Humphrey-Hawkins testimony that forward guidance could be adjusted after the word "patient" was removed from the policy statement, it essentially meant that the two- to three-meeting cushion provided by the wording was an invalid interpretation. As such, even though policymakers may have hoped to raise rates as early as June, it seems like the market is priming itself for a September liftoff at the earliest.
While the perceived dovishness is helping boost carry trades/higher yielding FX, it's curious that EURUSD isn't rallying on the developments. The key $1.1260-1.1460 range remains in place, even as Euro-Zone economic data (as measured by CESIEUR) and US economic data (as measured by CESIUSD) diverge to their widest differential since September 2012. Even though Greece is off the front page, it doesn't seem the implications of the recent negotiations have exited traders' minds.
--- Written by Christopher Vecchio, Currency Strategist
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