Overall this was quite a neutral statement by Janet Yellen in her semi-annual testimony to Congress. She does not give too much away in terms of what has to be in place for lift-off.

The most interesting part is what she says about forward guidance:

a) She repeats that ‘patience’ means rates are unlikely to be changed at the next couple of meetings

b) If forward guidance is changed (hence ‘patience’ removed) it does not necessarily mean rates will be raised in a couple of meetings. Instead, it means that conditions have improved to the point ‘where it will soon be the case that a change in the target range could be warranted at any meeting’.

So if ‘patience’ goes in March it would mean that meetings from June and onwards are possible lift-off dates – also July, which is without a press conference. This deals with the concern that if they remove the word ‘patience’ in March then the market will see it as an indication they will hike in June. They probably want the flexibility to hike in June, but also the flexibility to wait.

Outlook

We expect ‘patience’ to be removed in March to give the Fed flexibility to hike in June. We also continue to look for a hike in June based on continued robust employment gains and decent GDP growth rates. Risks are, however, still skewed towards a hike later (July or September).

Yellen’s testimony and our view that the Fed will begin lift-off in June supports our call of a broadly stronger USD over the coming 3-6 months. In our view, the USD should strengthen as long as we are waiting for the first rate hike, particularly versus currencies which are backed by ultra-loose monetary policy, such as EUR, JPY, CHF and SEK. We forecast EUR/USD at 1.12 in 1M, 1.11 in 3M and 1.10 in 6M, with USD/JPY expected to shoot higher to 120 in 1M, 124 in 3M and 125 in 6M.

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