Yellen Comments May Be a Blessing in Disguise for the US Dollar

Talking Points:

• Major currencies oscillate in digestion mode after Fed-inspired volatility
• Seemingly dovish Yellen comments may set the stage for US Dollar gains
• Euro may overlook German CPI given limited impact on ECB policy bets

The major currencies were little-changed against the US Dollar in overnight trade as markets digested the prior session’s volatility. The greenback fell by the most in two weeks against its top counterparts following comments from Fed Chair Janet Yellen that traders perceived as diminishing the scope for interest rate hikes in 2016. The priced-in probability for tightening at the June FOMC meeting – the next of the heavy-duty quarterly outings where key policy changes tend to emerge – dropped to 29.6 percent from 38.1 percent yesterday.

On balance, Yellen’s remarks echoed recent statements from other Fed officials made in the aftermath of this month’s FOMC sit-down. The Chair struck a cautiously optimistic tone about progress on the domestic front but warned of threats posed by external forces. While investors appear to be taking this narrative at face value, we’ve argued that it represents a tactical pivot in the Fed’s tightening strategy aimed at realigning official and market-based policy bets.

With that in mind, the Yellen speech seems to have amounted to an incremental step toward laying the ground work for avoiding the kind self-defeating risk aversion when tightening resumes (as proved to be the case after “liftoff” in December). As such, it helps sets the stage for future US Dollar gains despite amplifying near-term selling pressure.

The preliminary set of March German CPI figures headlines the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to edge higher to 0.1 percent having registered flat in the prior month. Absent a dramatic deviation from consensus forecasts, the outcome seems unlikely to have a material impact on the Euro considering its limited impact on near-term ECB policy. Indeed, the central bank seems entrenched in wait-and-see mode having just introduced an aggressive expansion of stimulus efforts.

What do DailyFX analysts expect from the US Dollar in 2016? Find out here !

Asia Session

European Session

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya's analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak