Fed’s Yellen Stokes USD Rally as Labor Progress Could Incite Rate Hikes

Talking Points:

- Jackson Hole Economic Policy Symposium today featuring Fed and ECB speakers.

- Fed Chair Yellen spoke at 14:00 GMT; ECB President Draghi to speak at 18:30 GMT.

- EURUSD sets new yearly low at $1.3220.

This year’s Jackson Hole Economic Policy Symposium may be considered to be carrying less clout than years past, but that doesn’t mean it wasn’t going to be a market moving event. With Federal Reserve Chair Janet Yellen’s speech at 14:00 GMT igniting volatility amid an already headline-driven market, it’s of little surprise that FX rates have been moving all morning.

Fed Chair Yellen’s main quip, of course, was that the US economy wasn’t quite yet at the point it needed to be in order to justify tighter monetary policy. That being said, it was very evident that the Fed’s dovish tone is starting to wane; even the Chair herself noted that the Fed was closer to achieving its policy objectives.

As expected, the Fed Chair pointed to weak wage growth and “significant” underutilization of the job market. Yet these are statements that have been hashed and rehashed numerous times over the past few months. Rather, the vague yet important notation made by Fed Chair Yellen was that interest rate hikes could be coming sooner than market participants currently expect, especially if the labor market begins to progress faster. Overall, this provoked an updraft in both stock prices and US yields, lifting the US Dollar.

Whereas the US yield curve was continuing to flatten (spread between short-term and long-term yields narrows) ahead of today’s speeches, US yields have shot up noticeably from their daily lows and are now flat on the day. This has resulted in the US yield curve from taking on a humped-like shape in price change over the past week, with the belly of the yield curve (3Y-7Y) selling off the most. This has proven to be USD positive in months past.

See the DailyFX Economic Calendar for Friday, August 22, 2014.

EURUSD 1-minute Chart: August 22, 2014 Intraday

Charts Created using Marketscope – prepared by Christopher Vecchio

Following the release of the comments, traders boosted the US Dollar higher across the board as the timing of rate hikes appeared to be closer to present day than originally believed. EURUSD fell to fresh monthly and yearly lows at $1.3220 at the time this report was written, while USDJPY traded to its highest exchange rate since January 23 at ¥104.18.

Read more: EUR/USD, USD/JPY Ready for Yellen, Draghi Jackson Hole Speeches

--- Written by Christopher Vecchio, Currency Strategist

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