USD: Will Yellen sound hawkish today? - ING

Research Team at ING, suggests that all eyes will be on Chair Yellen today, with her testimony to the Joint Economic Committee gaining even more attention following Donald Trump's election coup.

Key Quotes

“The possibility of a major shake-up at the Fed means that we're likely to see the Congressional committee focus on big-picture themes; in addition to discussions over a possible “Audit the Fed” bill and Taylor-rule style policy approach (both of which were scrutinised last year), today will be our first chance to gauge whether there is any real substance behind Yellen's inflation-overshooting theory.”

“Indeed, the Fed Chair recently floated the idea of running the economy hot to overcome any hysteresis associated with the financial crisis. Hence, in a world where the Trump administration is looking to deliver a sizeable fiscal package, the optimal policy stance here would be to keep rates lower than otherwise would have been the case under a strict 2% inflation target. This has a significant bearing on how markets may unfold in 2017: a bearish steepening of the US yield curve is likely to be less damaging to the global risk environment than a bearish flattening (and the Fed normalising rates quickly to anchor inflation). With a 94% probability of a Fed rate hike now priced in for Dec (and almost 1.5 hikes expected in 2017), we think any Fed-fuelled $ upside will only occur if Yellen explicitly rules out scope for running the US economy hot. Risks are that the USD rally takes a breather.”