Yields and USD fall ahead of Yellen Testimony

US equity markets are expected to open higher again on Thursday as we await Federal Reserve Chair Janet Yellen’s second day of testimony, this time in front of the Senate Banking Committee.

Yellen’s Dovish Admission on Rates Weighs on USD and Yields

As is often the case with these hearings, the vast majority of what was said had very little impact on the broader markets, with lawmakers drifting repeatedly onto more political topics and Yellen giving very little away on the Fed’s monetary policy position that isn’t already known. Yellen’s admission that rate increases will be gradual though – not a new revelation in itself – while highlighting persistent subdued inflation and low neutral rate, suggested that the pace of tightening next year and beyond may well be slower, with focus likely shifting to balance sheet reduction.

While many may have expected this to be the case prior to this, Yellen’s acknowledgement of this potentially signals a slight shift in the Fed’s rate outlook later this year, once the central bank unveils its plans to begin the process of reducing its bond purchases. In this moderate growth and low inflation environment, this comes as a relief to investors and therefore provided a temporary boost for equities. The question now is whether Yellen reiterates the point in today’s testimony, adds further colour to it or possibly backtracks on it.

DAX Ticks Upwards as German CPI Matches Forecast

Following Yellen’s slightly dovish testimony, the dollar has come off a little to trade near nine month lows as bond yields have also ticked a little lower. With central banks elsewhere only likely to pick up the pace, the US dollar may remain under some pressure for the foreseeable future. The Bank of Canada this week raised interest rates and the ECB could signal its intentions to continue to reduce its bond buying next week while the Bank of England may not be far behind on tightening.

Fed Speakers and US Data Also on the Agenda Today

Fed policy makers Charles Evans and Lael Brainard will also be appearing on Thursday, which could also grab some attention, with both being voters on the FOMC this year. We’ll also get some economic data from the US, including jobless claims and PPI inflation figures, although tomorrow’s retail sales and CPI inflation data is what traders will be primarily focus on, on that front.

Rate Differentials Pack a High Yielding Punch

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.