Chair Yellen’s speech overnight is more dovish than her March FOMC press conference and enough to offset the hawkish Fed speak from last week encouraging markets to start thinking about an April Fed hike. As such, Yellen appears to pour cold water on such thinking overnight with Citi Economics now foreseeing just one rate hike as likely in 2016, possibly September or even as late as December. Not surprisingly, the USD weakens though only moderately with more of the impact felt on US short rates as 2Yr Treasuries yields fall more than 9bp on her comments.
Chair Yellen highlights more uncertainty about the inflation outlook not just due to lower oil prices but for reasons related to risks to economic growth and that “…the return to 2.0% inflation could take longer than expected and might require a more accommodative stance of monetary policy than would otherwise be appropriate.” Yellen also elaborates on oil and the adverse spillover effects to the rest of the global economy were oil prices to renew their decline and also ratifies the lower trajectory for Fed Funds as projected by the ‘dot plots’ in the March FOMC and discounted in current market pricing (that only looks for one Fed rate hike in 2016) – the implication being the Fed is likely to hike only once or maybe twice this year.
Meanwhile earlier in Asian time, Japanese PM Abe announces he will front load the new FY budget but doesn’t mentioned a new package of stimulus spending despite earlier speculation nor does he hint at delaying the sales tax hike from 8% to 10% scheduled for April 2017. This sees USDJPY retreating well before Chair Yellen’s speech in NY with her comments adding to the decline.
In the euro zone, ECB member Makuch says the ECB would take additional action if needed but that “deposit-rate cuts as a tool are exhausted” while in the UK, the BoE’s Financial Policy Committee notes increased concerns about Brexit risks that may push sterling down some more and if to reinforce such concerns, the latest Ipsos MORI poll for the London Evening Standard shows 49% intend to vote Remain (down from 54% at the February 16 poll) while the Leave share rises to 41% (up from 36%).
None of this matters much though with FX focused exclusively on Janet Yellen’s more dovish stance and month end rebalancing, both of which point to some further USD weakness though with USD positioning near flat and US rates now discounting only one Fed hike this year anyway, any such weakness is likely to be fairly limited.