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Dollar turns choppy on mixed Yellen testimony

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In the run up to Janet Yellen’s testimony to the senate banking committee, the markets clearly shrugged off economic data which included a better than expected PMI services data but a weaker CB consumer confidence.

On the headline release of Yellen’s testimony, the Greenback initially jumped, in particular on noticing that one of the statements included the following:

“Guidance change to mean liftoff possible at any meeting”

However, reading into the testimony there were many hints of a cautious tone including the following points:

  • New guidance not necessarily talking about the next couple meetings
  • “Patient” means liftoff unlikely for couple of meetings
  • Fed will raise when reasonably confident on inflation
  • At some point liftoff will be meeting by meeting basis
  • Lower oil prices significant net plus for US economy
  • Inflation to fall further near-term
  • Expects inflation to gradually rise to 2%
  • Improving jobs and fading oil impact to lift prices

While the Greenback managed to make a session high to 95.06, the Dollar Index quickly reversed its gains as investors took time to understand the testimony. At the time of writing the Dollar Index was trading lower at 94.61 levels.

Overall Janet Yellen’s testimony was being understood by the markets as not offering any new insights and in particular there is a lot of hesitation in regards to lifting the interest rates, which saw the Greenback succumb into a few minutes after the testimony was released.

EURUSD dropped to a session low of 1.1287 before trimming its losses to trade back above the daily pivot level at 1.134 posting a session high to 1.135. Likewise, the GBPUSD hit a session low to 1.54021 only to rally back trading near the highs of 1.545 while the USDJPY failed to keep its gains reversing after hitting session highs to 119.84 to trade back down near 119.14 levels.

Most noticeable was the fact that commodity risk currencies managed to turn around on the news. AUDUSD managed to rally to session highs of 0.781 while NZDUSD was back near 0.748 while USDCAD dropped from the highs of 1.26639 to trade near 1.257 region.

While the markets are starting to be doubtful about a June rate hike, the current weakness in the Greenback should actually bode well with the US economy. The recent strength of the Greenback, as we noted in previous commentary was starting to take its toll on companies across all sectors, most noticeable within the exports sector as well as production.

The current weakness in the Greenback should possibly help in easing the pressure while also keeping an eye on the labor markets which has been very consistent and steady for the past couple of releases. Within the larger scope of our Dollar Index technical perspective, only a decline below 93.97 could signal the start of a correction in the Greenback. The next main short term risk to the US Dollar comes from the CPI release, due this Friday with consensus poised to the downside, expecting a -0.6% decline on the headline and a 0.1% increase on the monthly Core CPI.

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