Yellen on Deck – Will the Dollar be a Wreck?

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Market Drivers February 14, 2017
UK Inflation runs cold
ZEW misses
Nikkei -1.13% Dax -0.02%
Oil $53/bbl
Gold $1230/oz.

Europe and Asia:
GBP UK CPI 1.8% vs. 1.9%
EUR Flash GDP 0.4% vs. 0.5%
EUR ZEW 10.4 vs. 15

North America:
USD PPI 8:30
USD Yellen Testimony 10:00

The pound was clobbered in morning London trade today by weaker than expected CPI readings although producer price inflation rose at its fastest pace in 9 years.

GBP/USD dropped to a low of 1.2442 more than 100 points off the session highs after UK CPI reading printed at 1.6% vs. 1.8% eyed diminishing any expectations of a possible rate hike from BOE this year.

Consumer inflation remained well contained with clothing, furniture and transportation all showing declines. Producer price skyrocketed however, with core readings rising by 0.5% versus 0.3% eyed. ONS notes that factory gate inflation rose at its highest pace since 2008 with oil prices the main culprit for the increase.

Analysts have noted that it will only be a matter of time before inflationary pressures seep into consumer prices pushing UK CPI above the 2% BOE threshold. However, a close look at the data suggests a different explanation. The surprising decline in consumer prices may be a function of lack of demand, as the massive decline in purchasing power of the UK consumer due to exchange rate depreciation may be the reason for price declines on the consumer level. If that’s the case, UK producers will be squeezed in a vicious cycle of rising costs and falling demand which could have a negative impact on UK growth going forward.

In US today, all eyes will be on Janet Yellen as the Fed chief testifies in front of Congress. The consensus view is that she will maintain a positive outlook, reiterating that both the economy and wage growth continue to expand. However, the bull may be overestimating Ms. Yellen’s hawkish impulses. Given the great uncertainty surrounding fiscal policy and the general sense of political unrest in the country combined with declining consumer sentiment readings, the Fed chief is likely to err on the side of caution and reiterate that the FOMC will follow a gradual path. Most likely this will mean that the Fed will not consider another rate hike until June at the earliest.

USD/JPY which has floundered above the 114.00 failing to hold that figure since the start of the week could see some further selling if the market senses a more dovish tilt from Ms. Yellen. However, should she remain resolutely sanguine, the bull will quickly take control and USD/JPY could move towards the 115.00 level as the day proceeds.

Boris Schlossberg
Managing Director

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