The US dollar index managed to extend its gains above 80 and heading into day two of Yellen’s testimony, further gains are possible.
Janet Yellen’s testimony signalled a shift to a less dovish tone and some analysts feel we could hear an even more hawkish tone come the September meeting. With the Fed chair finally acknowledging that the labour market continues to improve quicker than anticipated, investors are already a bit wary. Yellen said this rapid improvement in the jobs market could see rate hikes occur sooner and more rapidly than currently envisioned.
Regarding rates lift off, Yellen suggested the median projection of the fed funds rate at 1% by the end of 2015 is more realistic. This is around 30 basis points above market pricing and is relatively consistent with a mid-2015 lift off. With this in mind, traders will be sceptical of being caught out on the wrong end of the USD. This is likely to keep the risk space on the back foot as we are already seeing in AUD/USD.
Yellen comments will remain in focus
Even a round of positive China economic data was not enough to lift the pair in the near term. China’s GDP, industrial production and fixed asset investment all came in ahead of consensus. Signs have continued to emerge that the Chinese economy has stabilised and naturally I would have expected this to benefit commodities and other risk plays.
AUD/USD printed a low of 0.9336 and continues to hang near those lows in Asian trade. There isn’t much on the AUD side of the equation and therefore focus is more likely to be on the USD side of the equation. Any further hawkish talk from Yellen could spell further near term weakness for the pair.