The Global Currency Strategy Team at BBH Markets, in its daily CurrencyView report, analyzed effects of the Fed Chair Janet Yellen's hawkish comments on the key US Dollar Index and provide a preview of important US macro data scheduled for release on Wednesday.
“The Dollar Index's ten-day rally was at risk yesterday, but Yellen's reiteration of the commitment to continue to gradually lift rates helped extend streak to eleven sessions. This surpassed the streak seen around the election (November 7-November 18). With today's gains, it may draw closer to what appears to be the longest streak, 14 sessions between April 30 and May 17 2012. To put it slightly differently, the Dollar Index has not had a losing session this month.”
“Although Yellen's comments were seen as dollar positive, the impact on the outlook for Fed policy did not change very much. Consider that implied yield of the March Fed funds futures slipped half a basis point to 0.69%. The average effective Fed funds rate is steady at 66 bp presently. The implied yield of the June Fed funds futures contract rose to 0.84% from 0.825% while the implied yield of the December contract roe three basis points to 1.13%.”
“Yellen did not seem to break fresh ground yesterday. She stuck close to the FOMC statement in her economic assessment. All meetings are live, including March. If there was something new, it may have been that the Chair did not see using the unwinding of the balance sheet as a policy tool, such as to remove accommodation. We thought that it could indeed be used like that. The time frame is not clear, but it appears discussion of reducing the balance sheet will begin shortly. Many look for an announcement toward the end of the year, with implementation beginning sometime next year.”
“After a quiet few days for key US economic data, the calendar is full today. The US reports January CPI, retail sales and industrial output, and the February Empire survey. The Bloomberg median forecast is for a 0.3% rise in January CPI for a 2.4% year-over-year pace, but for the core rate to slip to 2.1% from 2.2%. We suspect the risk is on the upside.”
“Retail sales will also be in focus. The 0.6% rise in January will not be repeated, but the GDP component was up 0.2% in December and could improve on that in January. Here we suspect that the markets may be more sensitive to disappointment with consumption than inflation.”