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Grilled Yellen non-committal on rate hike path

Grilled Yellen non-committal on rate hike path

Today we have the second day of Fed Chair Janet Yellen’s congressional testimony. Following day one, Yellen’s remarks were broadly interpreted as dovish, causing the Dollar to weaken.

Going into today, the outlook is more clouded as Yellen gets grilled again, but this time by the Senate Banking Committee. With a change in the lawmakers firing the questions at the Fed Chair, investors will hope to identify up to date views of the Federal Open Market Committee’s view of the near future. There were short spates of positive/hawkishness yesterday, as Yellen noted that the US economy does appear healthy and normal, despite widespread global uncertainty. However, this was not enough to alter the direction of the US Dollar. Going into today Yellen may be able to reverse some of the currency’s losses if she can build on that positive rhetoric.

UK industrial production data has fallen again, showing a 1.1% decline for December following a revised 0.8% drop previously. Energy and mining output dropped the most, but manufacturing was also weaker. The CBI revised their growth forecast for the UK to 2.3% this year (down from 2.6%) and to 2.1% for 2017 (from 2.4%). Whilst still good figures, the revision downwards is based on recent reductions in wage growth and productivity forecasts. We’re still expected to be one of the fastest growing “advanced” economies as the fundamentals and domestic demand are strong.

After losing ground versus the Dollar, Sterling rebounded as risk appetite improved, peaking near 1.4580 before fading again. The Pound failed to retain gains versus the Euro in volatile trading conditions as risk appetite tended to deteriorate. The latest NIESR GDP estimate also recorded a slowdown to 0.4% in the three months to January, while the RICS house-price index was unchanged at 49%. Next week’s EU Summit will add political risk with David Cameron and European Council head Donald Tusk battling to secure support for the UK renegotiations.

Eurozone production data still disappoints with a sharp 1.6% decline in French production and a 0.7% drop in Italian output for January. There was a firm recovery in Eurozone equity markets with financial stocks rallying strongly after a run of heavy losses which curbed defensive Euro demand. There were rumours that the European Central Bank could buy banking-sector bonds as part of any extended quantitative easing programme. Against the Dollar, the Euro benefited from the Greenback’s weakness yesterday and opens today in 1.13 territory. Risk based flows into the Euro has sustained its gains against the Pound too.

And Greece is in trouble…again. They need more cash, the economy is faltering, they face a tidal wave of migrants and pension reforms have triggered the largest protest they’ve ever seen. Creditors are demanding more cuts – they have already shelled out a lot, however the cash has not solved the underlying problems. The Greek government is in a fragile position.

Data to watch: 3pm Fed Yellen Testifies. Eurogroup meeting .

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