Dovish Yellen signals potential delay in rate hike

Forex News and Events

A dovish Janet Yellen spoke in front of the congress (by Yann Quelenn)

As we said yesterday, we expected Janet Yellen to announce that the Fed would delay a hike. Yet, she has refused to admit that the current Fed strategy to achieve a normalized monetary policy has so far proven inefficient. She mentioned that overall financial conditions have become less supportive of growth. In particular that unemployment rates have lowered but better job conditions have not provided the awaited effect of a decent wage growth necessary to spur inflation toward the Fed’s target of 2%.

Yellen also claims that she is wary of increasing rates too abruptly in case this pushes the economy in recession. The real truth is that American debt is way too large ($18 trillion) and interest on this debt would explode if interest rates increased too much. This is why, Yellen is even considering negative interest rates to avoid this from happening and especially to prevent a recession. Yet, at some point inflation is needed to destroy debt, but this is not on the cards anytime soon because in our view job market conditions are largely overvalued. As a result, we think that there is a strong possibility of a QE4 which would inject fresh money to save GDP. We are no longer in the era of monetary policy divergence or normalization. We are now firmly in negative interest rates territory and Yellen is considering this option despite the fact that she “is not sure if Fed can do it”.

Swiss deflation entrenches yet CHF strengthens (by Peter Rosenstreich)

Switzerland’s inflation data for January remained deep in deflationary territory, as was broadly expected. Swiss CPI held at -1.3% y/y, -0.4% m/m, while core CPI -0.9% yet m/m fell -0.4% from -0.1%. CHF was stronger against the USD and EUR as a function of deteriorating risk sentiment rather than domestic developments. The weak price outlook reported today will only fuel market expectations for SNB action. Recent jumps in official sight deposits (575.4bn from 559.5bn), combined with a steadily weaker CHF had traders speculating on FX interventions. We thought it was unlikely that the SNB had any involvement based on consistent CHF valuations effects and already bloated balance sheet. However, steady safe-haven trading has reversed the CHF strength. Bow faced with a soft economic backdrop and strong CHF, the probably has increased significantly that the SNB will act. This said, direct FX intervention is less likely than further reducing already negative rates (although both have received the SNB's blessing on a steady basis). SNB President Thomas Jordon has clearly indicated his view that the CHF is overvalued and that the rate can be “lower than it is where we are now” (lower band currently at -0.75%). With monetary policy divergence which drove the USD strength now fading, expectations for the ECB to increase stimulus in March and global uncertainty driving capital back into CHF, the SNB is once again in an uncomfortable situation. The SNB needs to make the CHF unattractive to foreign and domestic buyers but realistically have limited tools. However, it’s too early to act so expect the CHF to continue to gain against G10 currencies in the near term.

Gold - Breaking 1200 Dollars

The Risk Today

Yann Quelenn

EUR/USD keeps on pushing higher. Daily resistance lies at 1.1387 (20/11/2015 high). Hourly support may be found at 1.0711 (05/01/2016 low). Yet, expected to show further increase. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD's short-term momentum is still lively. Hourly resistance can be found at 1.4668 (08/02/2016 high). Hourly support can be found at 1.4081 (21/01/2015 low). The technical structure looks very positive. Expected to show further increase. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is declining as expected. Hourly resistance lies can be found at 123.76 (18/11/2015 high). There is no hourly support for the time being. The road is wide open for further decline. The strong support at 115.57 (16/12/2014 low) has been broken. We start favouring a long-term bearish bias. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF keeps on moving lower. Hourly resistance can be found at 1.0328 (27/11/2015 high) and the technical structure suggests that the road is wide open for further decline. Expected to show continued weakness In the long-term, the pair has broken resistance at 0.9448 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: