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Yellen’s hawkish speech ignites USD demand
Federal Reserve (Fed) Chairwoman Janet Yellen surprised the markets by stating that the U.S. is on track for increasing interest rates before the end of the year that generated demand for the U.S. dollar. During her speech at the University of Massachusetts on Thursday, Ms Yellen appeared hawkish as she said that there is a prospect of a rise provided that inflation levels are stable and there is adequate U.S. economic growth for new jobs creation.
Even though there was a modest expectation for an increase this month, the Fed instead held the rates stable at the same ultra-low levels of 0.25% due to worries of slowing economic growth. These rates are being applied for the last seven years in an effort to aid the world’s stronger economy to recover from a dramatic crisis. The decision to leave rates intact was voted by nine out of ten members of the Federal Reserve Open Market Committee (FOMC), while only the committee’s Jeffrey Lacker voted for a marginal increase of 0.25%. The long-term strategy of the Fed is to wait for significant improvement of the labour market and also for the inflation rate to increase towards 2% before making a decision for an interest rate increase.
Through a separate statement prior to the latest FOMC meeting, the World Bank gave its views on how a possible interest rate increase would affect the global economy. The Bank warned developing countries to maybe anticipate a significant reduction of capital inflows that would damage their rates of economic growth.
But Yellen’s speech took place only a week after the decision to stick with current interest rates, when she said that the U.S. economic outlook appears solid and that she and the rest of the policymakers are not anticipating some adverse economic developments to significantly derail the Fed’s policy. The recent inflationary weakness the U.S. experienced is because of specific factors such as the dollar’s strength and the low crude oil prices, however she thinks that these factors are temporary. But if inflation levels grow slower than forecasted, she said that the FOMC would adjust their action plan accordingly.
Demand for the U.S. dollar increased after the media forwarded Janet Yellen’s speech to the public as there was an immediate drop of the EUR/USD by 0.5% to under the 1.12 level within one hour. The world’s most popular currency decreased on a weekly basis by 0.8% and ended trading at 1.11977.
Given the Fed’s hesitation to increase interest rates and also Janet Yellen’s apparent hawkish speech, it is only natural that the markets remain cautious as to the next currency market developments. September is coming to an end and this automatically implies the upcoming release of the Nonfarm Payrolls (NFP) data, expected for release on Friday 02 October at 12:30 GMT. Employment data have been strong during the past few periods so the possible release of another strong reading might not have a dramatic effect on the EUR/USD. But in case there is a drop in new jobs created, that might prevent many investors from selling the currency pair.
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