Yellen Boosts US Dollar But "Brexit" Threatens Follow-Through

Talking Points:

• US Dollar retraced gains overnight after snapping 4-day losing streak
• Yesterday’s rally triggered by hawkish interpretation of Yellen testimony
• Betting on follow-through dangerously premature before “Brexit” vote

The US Dollar corrected lower in overnight trade having outperformed in the prior session. The benchmark unit snapped a four-day losing streak as Janet Yellen testified in the US Senate. The move tracked a rally in front-end Treasury bond yields, hinting that traders divined hawkish cues in the Fed Chair’s comments.

Yellen was cautiously dismissive of May’s disappointing labor-market data, saying the slowdown in job creation to be transitory. She added that inflation is still expected to rise the central bank’s 2 percent objective once headwinds fade, opening the door for officials to proceed with cautiously raising rates.

Speculation on the direction of Fed monetary policy is unlikely to find lasting follow-through however as the “Brexit” referendum looms ahead. In fact, Yellen herself acknowledged that the vote could have significant economic repercussions, triggering volatility that impacts the US.

Put simply, this means that if the UK opts to leave the EU, the degree of dislocation across financial markets may be so great as to materially alter the path of US monetary policy. This means that extrapolating trades out of what Yellen said before the dust settles on the referendum outcome looks dangerously premature.

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

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