Yellen says Goodbye to the Dollar as the EUR and Sterling Bounce Back

Yellen’s dovish tones on Wednesday added to the recent surprise central bank speeches in recent weeks, Yellen raising concerns over softening inflation and the need for the FED to maintain its cautious position on monetary policy, the testimony coming ahead of tomorrow’s June inflation figures.

It was a perfect speech for equity markets, with the FED chair’s positive outlook on the U.S economy, combined with the view that the FED will need to maintain its lower and slower approach on monetary policy driving demand for riskier assets through the Asian session following strong gains in European and U.S markets on Wednesday.

The Dollar bulls continue to lose further ground however, with the Dollar Spot Index down 0.25% at 95.52 at the time of the report, any hopes of a more aggressive rate path now largely priced out, the Dollar needing growth policies to provide any sustainable recovery, with the ongoing investigations into Trump Junior adding to the negative sentiment to the Dollar.

Stats out of the U.S this afternoon are on the lighter side, limited to the weekly jobless claims figures and June’s producer price numbers, which will provide the Dollar some direction, but unlikely to be enough to shift the negative sentiment.

The EUR has certainly benefited from the weakness in the Dollar, with this morning’s finalized June inflation figures largely in line with forecasts, supporting the EUR’s 0.32% gain through the early part of the day.

Monetary policy divergence sits firmly in favour of the EUR for now, with only Draghi capable of shifting market expectations of a move by the ECB in the coming months.

The light economic calendar this week continues to leave the markets focused on the outlook towards monetary policy, with Wednesday’s employment numbers out of the UK driving appetite for the pound, the improved figures adding further pressure on Carney and the team to lift interest rates in early August, at the next MPC meeting.

At the time of the report, cable is up 0.43% at $1.29406 with $1.30 levels in sight as the markets begin pricing back in a move, in spite of the weak macroeconomic data out of the UK last week. The good news for the Sterling bulls will be a lack of material stats out of the UK through the remainder of the week to upset the applecart, though one does wonder whether Yellen’s dovish tones will influence Carney or Draghi to soften the hawkish sentiment that has provided strong support for the respective currencies.

We will expect the Dollar to make a partial recovery ahead of tomorrow’s retail sales and inflation figures, though any hopes of a rebound from the 1^st half of the year will need to be on hold for now, with the EUR and the Pound on the bounce.