Yellen’s semi-annual testimony monetary policy report is going to hold the headlines for today and tomorrow and all eyes will be on the tone she’ll use. A hawkish one should send the U.S. dollar higher.
The market shows a mixed picture so far this year. The Australian dollar is by far the best performing currency against its American counterpart, while the Euro is lagging. If this is about to change, chances are it is going to change this week.
Coming back to the testimony, the first part of it is the most important one, as usually, the second one is exactly the same so that is no surprise element anymore. Therefore, look for market’s reaction today to be more violent than the one tomorrow. However, there were situations back in time when this statement didn’t hold true.
The Federal Reserve’s job or mandate is to create jobs and bring inflation below or close to two percent. Both tasks are done and the pressure is on Fed now to raise the rates.
While this is no secret anymore, there are skeptical people doubting the Fed will hike three times this year as mentioned on the last December hike. No matter how you put it, the fact that the Fed is on a tightening cycle should put pressure on other currencies, especially on the ones with negative interest rates, like the Euro or the CHF.
Inflation or the CPI (Consumer Price Index) is released on Wednesday and the Core number is the one to watch. While it is projected to come at 0.2%, pressures are for the number to be higher than its forecast. If that is the case, bets for Fed to raise rates in March will increase.
After all, this is what matters: what the Fed will do and when it will raise the interest rates. Keep in mind that the U.S. dollar is the world’s reserve currency and when the interest rate is changed, it has a snowball effect on the global economy.
Emerging markets are the first ones to be affected as they borrowed at cheap rates and will be forced to pay higher interest rates moving forward. But I would say that this is somehow priced in.
What is not priced in is Trump’s administration next move. Tax cuts are being promised for both businesses and regular citizens but it is not known the exact nature of these cuts. More details here should result in even more volatility than the Fed hiking rates or not.