Dollar Hollar: Yellen Testimony Offers No Support To USD

Yellen Testimony Offers No Support To USD

Fed Chair Yellen testimony offers no support to the USD. Appearing in front of Congress for the first of two testimony’s yesterday, markets are watching to gauge whether the US central bank intends to raise interest rates again in the near future as Yellen makes her second testimony today in front of the Senate. In response to recent market turmoil markets have priced out significant likelihood that the Fed will hike rates again this year. Yellen’s initial statement to Congress was released prior to the scheduled testimony.

Yellen spoke explicitly about the downside risks to US economic activity. And she suggested that if recent stress were to continue, that would slow the pace of rate hikes relative to what the FOMC envisioned just a couple months ago. Yellen never mentioned negative interest rate policy in her text or dwelled on the possibility that the Fed may have to reverse its December rate hike. Her forward-looking comments were still grounded in the assumption that the next policy move would be a rate hike, and the only question was how fast the funds rate target would be increased. Regarding downside risks, Yellen was far more explicit than the nod to global developments in the FOMC’s January 27 FOMC statement.

Among her key observations were the following: “Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market…” “Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth.

These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.” But Yellen was quick to point out developments that could mitigate these downside risks: “declines in longer-term interest rates and oil prices provide some offset….” “ongoing employment gains and faster wage growth should support the growth of real incomes…” “therefore consumer spending and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad…” “economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost U.S. economic growth more than we expect…”
The overall message is that the Fed is not certain what to make of recent developments and so for now is just ‘monitoring’ the situation. The majority on the policy‐making board remain hopeful that economic conditions will continue to improve but are wary that markets may be sending them a very different message.

Technical & Trading Takeaway

2016-02-10 19_15_56-DXY_ 96.104 ▲+0.05% - EU - TradingView

A failure at the apex of the consolidation suggests we test bids at 94.50 next, this would be a decidedly bearish development and as such I would not be looking to buy this test lower I would wait for a corrective upside reaction to test the apex from below where I would look to establish bearish USD exposure as per the chart above.

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