Saturday, May 28, 2016

FOREX - Dollar gains before Yellen speech

U.S. Treasury prices fell on Friday with short-dated yields spiking up after Federal Reserve Chair Janet Yellen said gradual U.S. interest rate increases would be appropriate if the economy improves further and the labor market tightens.

"And, probably in the coming months such a move would be appropriate", she added, while speaking at Harvard University.

The US central bank is expected to announce two to three interest rate hikes this year after it increased rates in December for the first time in almost a decade. "The modest upward revision to first-quarter nothing to worry about when the most recent incoming data point to a big pick-up in second-quarter growth", he wrote in a report.

However, the lack of improvement in pricing odds is an affront to recent economic data momentum: the Citi Economic Surprise Index for the U.S. just hit its highest level (-20.4) in over a month (-21.9 on April 18); and the Atlanta Fed's GDPNow Q2'16 growth forecast has improved to +2.9% SAAR.

Weak oil prices and a strong dollar have been blamed for helping to keep US inflation below the central bank's target.

USA stocks traded slightly higher Friday as traders awaited comments from Fed Chair Janet Yellen, ahead of the Memorial Day long weekend. The minutes showed that Fed officials believed the strengthening economy might warrant a rate hike in June.

United States stocks rose on Friday and finished sharply higher for the week after Federal Reserve Chair Janet Yellen indicated that a rate increase in the coming months would probably be appropriate. The Atlanta Federal Reserve is now estimating second-quarter GDP rising at a 2.9% rate.

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However, she said that there hadn't been much improvement in wage growth, and that output and productivity growth has been "remarkably slow", proceeding at a "miserable pace" in recent years.

It's possible that headwinds could hold back the Fed form raising rates this summer. "One of the factors contributing to our view of the gold market being more resilient to a Fed rate hike was the assumption that if this would occur in September, physical demand seasonality kicking in would help cushion the downside".

Another interest rate increase after December's hike may be coming sooner than investors think.

The Commerce Department said the USA economy was a bit stronger in the first quarter than it initially believed. "We suspect there is some tolerance (about the time it would take to reach the inflation target)", Greg Fuzesi, an economist at JPMorgan, said.

Gold slid to an eight-week low amid the U.S. rate hike speculation. The so-called "investor fear index" is trading at its lowest level of the month.

Yellen's comment "reinforces the signals on early rate hikes communicated recently by her FOMC colleagues", Mohamed El-Erian, chief economic adviser at Allianz, said via Twitter[2] of the policy-making Federal Open Market Committee.

A final communique from the G7 leaders meanwhile emphasized economic growth was an "urgent priority" and highlighted growing worldwide alarm over the possibility of a "Brexit" as the United Kingdom prepares for a June 23 vote on whether to leave the EU.

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