Piotr Matys, EM FX Strategist at Rabobank, notes that the dovish comments from Federal Reserve Chair Janet Yellen reignited positive sentiment in the market.
Key Quotes
“After running out of steam last week, the S&P500 regained its upside momentum and posted the largest daily gains since the middle of March ending Tuesday’s session 0.88% higher at 2,055.01 (marginally below the year-to-date intraday high at 2,056.60 set on March 22). While the DJIA gained 0.56%, it proved insufficient to break above the March 22 high at 17,648.94, which would have been an encouraging technical signal for the bulls. Still, the buyers (at least those with a short-term view) remain in charge as Yellen reiterated that the Fed will proceed cautiously in raising interest rates.
More importantly, Yellen outlined a rather long list of factors that the Fed will monitor closely during its monetary policy normalization process: global economies and financial markets need to stabilise; she also implied that the pace of USD appreciation will play an important role given that a strong USD would prevent inflation from rising and could also undermine exports; commodities need to stabilize as well to allow foreign producers to recover from the carnage caused by the precipitous fall in various commodities over the past 20 months or so; a contribution to the US economy from the housing sector needs to increase. Speaking about inflation, Yellen expressed her scepticism the recent rise in core inflation (excluding food and energy) “will prove durable.”
It seems that the markets interpreted Yellen’s goals as somewhat unrealistic and reacted accordingly. The odds that the Fed may hike in April fell to virtually zero from already low 6% before her speech. Even more importantly, the implied probability of a move on June 15 fell from 38% to 28% after Yellen finished speaking.
Yellen’s dovish remarks left the US dollar on track to end Q1 deep in the red against its G10 peers (excluding sterling due to concerns about Brexit). Rallying in Q3 and Q4 on the back of monetary policy divergence, the DXY index is looking increasingly vulnerable on the downside. It is worth pointing out that the 50-day moving average fall below the 200-day moving average on the daily DXY chart – a technical bearish signal known as “death cross.”
(Market News Provided by FXstreet)
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