Yellen in focus

The Day So Far

UK CPI rose to 1.8% Y/Y in the month of January, marking the highest rate since June of 2014. Despite this statistic the GBP fell sharply as it was below market expectations (1.9%) with upward price pressures partially offset by price declines for clothing and footwear. The release was a good example of market positioning in which participants had become somewhat obsessed by the fear of rapidly rising prices in the UK and what this might eventually mean in terms of a policy response from the Bank of England (BOE). Certainty this had feed into market psyche of late with expectations of an interest rate hike in the UK by the summer of 2018 increasing from approximately 30% at the start of the year to north of 90% by the end of January. The BoE’s Quarterly Inflation Report last week was a surprise in that the forecasts were left little changed with the MPC foreseeing inflation peaking at 2.8% on the horizon, with the majority having “tolerance” for above target inflation. This then followed by a relatively tame incline this morning has taken some of the bite out of the fears that were growing this time last month on the inflation front.

Looking more longer-term once Article 50 is triggered in the coming weeks and if inflation does not materialise at the rate in which many had feared, then in combination with an ambitious tax plan to be announced from Trump towards the end of the month, might act as the next catalyst to see more weight come into the GBP/USD in realisation of what most banks are anticipating which is a decline in the pair over the coming months.

The Day Ahead

From a fundamental point of view today’s US session is dominated by Janet Yellen’s speech at 3pm London time where she will provide her latest testimony to the Senate Banking Committee. This event is historically seen as an opportune time for the Fed to communicate their latest assessment on the economic environment outside the realms of the traditional monetary policy meetings. Overall I am not expecting a great deal from the Fed Chair in that she will likely reiterate her message that the economy is close to full employment and that inflation has risen, however it will fall short of hinting towards any immediate action at the next meeting in March. The timing of course comes after her Vice Chair Stanley Fischer said just this weekend that there is “significant uncertainty” around the fiscal policies under Trump. As such, although Yellen might refer to March as alive meeting this is simply a play to keep all options on the table where in reality it is most likely that a slow and steady hand will be enacted by the FOMC.