Pound to Dollar Settles Down after a Steady Janet Yellen Leaves Door Open to Interest Rate Rise in Second Half of 2016

janet yellen us dollar 1

The dollar appears to be stabilizing versus sterling after Janet Yellen's recent commentary mixed positives and negatives in equal measure.

After a roller coaster ride over the last few days the GBP/USD pair appears to be settling down, at least according to online currency broker Hantec's market analyst, Richard Perry:

"The incredible volatility of the past few days which has resulted in three strong bull, bear and bull candles successively could be showing some signs of settling today with little significant movement overnight."
Perry describes the technical outlook as 'choppy and uncertain':

"Although there is a marginally bullish bias to momentum, this is rather indicative of the fluctuations within a range, with the RSI hovering around 50, the MACD lines all but neutral and the Stochastics mildly rising again."

He describes the range has having a 'floor' at 1.4330 and a 'ceiling' at 1.4770 - "with much between just noise."

Yet despite the range-bound consolidative tone he acknowledges continued risk of volatility from referendum poll news:

"The Brexit polls may have been driving sentiment in recent days, and are likely to continue to do so in the coming days so this is something to keep in mind."

Janet Yellen's Speech

If there was a key phrase in Janet Yellen's speech in Philadelphia, then it came in the opening paragraph where she praised the progress made by the economy saying:

"The news from the labor market over the past year has been generally good, with significant job gains, the unemployment rate declining below 5 percent, rising household incomes, and tentative signs of faster wage growth."

Yet she followed this by pointing out continued fragility in the sector:

"At the same time, recent signs of a slowdown in job creation bear close watching."

She also added later in the report that the report had been "concerning", yet at the same time produced an antidote in warning not to place too much importance on a single data point:

"Although this recent labor market report was, on balance, concerning, let me
emphasize that one should never attach too much significance to any single monthly report."

Overall she was more positive about the labour market than expected, however, she also pointed out that marginal groups were also still struggling to find jobs, highlighting the plight of Black and Hispanic Americans.

Overall her view seemed to be that an interest rate rise would necessitate more consistently positive labour market data.

She further summarised her views as thus:

"Inflation has been lower than our objective of 2 percent, but I expect it to move up over time for reasons that I will describe. If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives."

She also pointed out how risks emanating from outside factors such as Brexit and China were increasing, and these could become a factor in policy again.

Her words surprised investors who had been expecting the Fed chief to take a most negative, cautious approach, and the dollar spiked higher initially, although it gave back its gains as she balanced her views.

Analyst Petr Krpata at ING believes Yellen has not written off the prospects of a 2016 interest rate rise as some in the market had been expecting following last week's empoyment data:

"The fairly balanced speech (a) leaves the door open for rate hikes in H2 2016 (we still look for a Sep hike); (b) was enough to prevent further dovish re-pricing of the Fed funds rate outlook, something the Fed want to avoid so it does not want to face potential disruptive hawkish re-pricing in months to come once/if it hikes rates."

With the key event of the week out of the way, ING expect most of G10 and EM USD crosses to settle around current levels for the reminder of the week.