Fedfacts Outweigh Fedspeak After Yellen’s Remarks

After hawkish comments from some Fed members last week boosted the USD, Chair Janet Yellen brought the dollar back to earth. Sticking to the points made in the March Federal Open Market Committee (FOMC) statement and her press conference Yellen was clear in communicating it will be gradual recovery. Gradual was the keyword of her speech today before the Economic Club of New York.

The EUR/USD moved higher as soon as the text of the speech was made public. The same dovish tone that had clobbered the dollar after the FOMC meeting on March 16 was present in Chair Yellen’s remarks. The currency pair jumped to 1.1260 and remains there with few surprises expected.



US economic growth in the fourth quarter was respectable, but there are signs that we could see softer numbers for the first quarter of 2016. The Atlanta Fed downgraded its forecast for Q1 from 1.4 percent to 0.6 percent. The original forecast, released last week, was lowered in response to a downgraded estimate of personal income and outlays by the US Bureau of Economic Analysis. US Final GDP for the fourth quarter rose 1.4 percent, above the estimate of 1.0%, but lower than the 2.0 percent gain in the third quarter.

After a dovish policy statement from the Fed earlier this month, an interest rate hike did not seem likely before June. However, a flurry of hawkish statements from Federal Reserve members last week caught the markets by surprise and resulted in broad gains for the dollar, as the euro slipped 150 points. With some Fed members calling for a rate hike as early as April. The CME FedWatch Tool saw a rise in probability of a rate hike on the April FOMC meeting up to 11.5 percent. Today that number stands at 6.9 percent and will go down as the market digests the cautions remarks from Chair Yellen.

The head of the U.S. central bank was sure to repeat the mantra of monetary policy: The Fed will act if needed and there is no plan set in stone. If the economic recovery accelerates they will adjust with a higher pace of hikes, likewise if economic conditions worsen they could cut the benchmark interest rate. The readiness for any scenario will not ease the concerns of investors who are still questioning the strength of the U.S. economy.



The USD is weaker across the board. The interest rate divergence gap will continue to exist as other central banks have committed to negative rates, but from Yellen’s words the Fed will not be making the gap wider until the economic outlook in the U.S. improves. Commodity currencies advanced versus the U.S. dollar (NZD 0.48 percent, AUD 0.42 percent and CAD 0.30 percent).

After Yellen’s remarks the chances of a rate hike in the first half of the year are severely diminished putting downward pressure on the USD ahead of private ADP payrolls tomorrow and U.S. non farm payrolls (NFP) on Friday.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza