"Fed Chair Yellen’s semi-annual monetary policy testimony yesterday – while much anticipated – did little to shift the dial for FX markets. It has set the stage for a quieter USD tone up to and possibly beyond the 6 March payrolls number and the 18 March FOMC meeting, as the market focuses on whether patience has run out at the Fed. A resumption of the underlying strong USD trend does not appear likely in the near term.
"For the USD against the likes of EUR and JPY this suggests that consolidation is a bestcase outcome for now. Even a strong payrolls number on 6 March looks unlikely to change this picture unless it leads to a material shift in the market’s perception of the likelihood of US rate hikes coming either sooner than expected (currently only September is fully priced for a 25bp hike according to our US rates strategists), more rapidly than expected (the subsequent rate hike is not expected until Q1 2016) or that the terminal rate will finish higher than expected.
Our US economics team continues to forecast that a) the Fed will start hiking in June and b) that there may be as many as four 25bp rate hikes seen in 2015. Clearly these outcomes would be more aggressive than the market is pricing in, and these underpin our longer-term USD-bullish outlook and bullish USD longer-term trades in our trade recommendation portfolio. We do not have enough reasons yet to change these views based on Yellen’s testimony. By definition, the US outlook will be highly data dependent, and we prefer to see more of such data before changing structural views. But near term we need to look away from the greenback for trade ideas."
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