Fed Chief Signals Growing Risks to US Economy
The US Federal Reserve (Fed) Chairperson, Janet Yellen, warned that the recent global risks could weigh on the outlook for economic activity in the first day of the two-day semi-annual testimony before House and Senate committees. However, she retained the current policy stance on expectations that ongoing employment gains and wage growth could be supportive of the US economy. The Fed Chair will return for a second day of testimony later today. In addition, today’s update on weekly US jobless claims will provide some fresh insights on evaluating Yellen's forecast.
Earlier today, the Confederation of British Industry (CBI) slashed its UK economic growth forecasts for both 2016 and 2017 due to a weaker performance at the end of last year.
The Pound – US Dollar currency pair slipped below the 1.45 mark yesterday after the US Fed Chairperson suggested that the Fed will continue to pursue gradual adjustments to the monetary policy. Earlier, Sterling had hardly responded to disappointing UK industrial and manufacturing production data. Later in the day, the National Institute of Economic and Social Research (NIESR) projected that the UK economy grew at a slower rate in the three months ended in January 2016 due to weakness in the production sector at the end of last year. The dismal GDP estimates added some downside pressure on the UK currency against the greenback.
Today, the CBI followed the Bank of England and downgraded its growth forecasts on the UK economy for this year, citing the upcoming EU referendum, weak productivity and global turmoil as downside risks for the economy. In some positive news, the RICS survey revealed that the headline price balance held on to December’s downwardly revised level, while buyers rushed into the market ahead of an increase in stamp duty in April.
US Dollar – US Markets
The highly-anticipated two-day testimony by the Fed Chairperson, Janet Yellen, which commenced yesterday attracted significant market attention and provided some support to the US Dollar. The greenback partly recovered against the major currencies after Yellen stated that US economic growth remains strong on the back of continued hiring and wage gains, hinting at gradual increases in interest rates. Yellen’s comments were a setback to expectations that the US central bank would reverse its course on rate rises. In her initial testimony, Janet Yellen, took a balanced approach as she recognised tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth as potential downside risks to the US economy. Though she did not give any particular time frame for further rate rises, her remarks implicate that a March interest rate increase looks unlikely.
Later today, investor focus will be on further input by Janet Yellen on the second day of the testimony. Also on tab will be the reading of the number of applicants filing for initial jobless benefits in the US.
Euro – European Markets
The Euro nudged lower against the US Dollar in yesterday’s trading session after the US Fed Chair, Janet Yellen, in her testimony stated that economic conditions in the US are strong enough to pursue gradual increases in interest rates and that the central bank is unlikely to reverse course.
The shared currency has regained most of its lost ground against the greenback this morning and surpassed the 1.13 mark. With no major economic releases scheduled in the Euro region today, investors will track the global market sentiment ahead of round two of Janet Yellen’s testimony. Moving ahead, a slew of key economic releases in Europe are scheduled tomorrow. The focus will be on Euro zone growth figures for the fourth quarter, expectations are that growth in the Euro zone will slow down after data showed that retail sales growth eased and household spending dipped in the last month of the year. Investors will also focus on the fourth quarter growth numbers for Germany, where recent dismal industrial production data might dampen expectations.
Other Currencies – Highlights
The Swiss Franc continued to trade higher against the US Dollar today even as data showed that consumer price index in Switzerland dropped in the first month of the New Year from the prior month, in line with market expectations, indicating a deflationary trend for a third consecutive month. This was the fifteenth straight month of dropping prices on an annual basis. The decline in consumer prices for January was largely attributed to a drop in sales in the clothing industry as well as due to falling prices for petroleum products.
The US Dollar – Swiss Franc currency pair is witnessing volatility as investors’ eye further inputs about the future course of interest rates in the US from Fed Chair, Janet Yellen, on the second day of the semi-annual testimony before the Congress. On the first day, Janet Yellen expressed confidence regarding the strength of the US economy. The tone of the comments suggested that the Fed still intends to gradually increase interest rates.