Equity bulls received a shot in the arm while the dollar was under pressure after Janet Yellen caught markets unaware by striking a dovish tone in her congressional testimony on Wednesday. Although Yellen reiterated the Federal Reserve’s game plan to continue gradually tightening monetary policy, the lack of commitment to a hiking timeline and tone of caution, prompted investors to offload the Greenback. A key takeaway from the first round of the testimony was concerns raised over softening inflation, which may encourage market participants to re-evaluate the pace of monetary tightening this year.
With no fresh clues offered on the timings and magnitude of the balance sheet reduction on Wednesday, markets will closely scrutinize Yellen’s second appearance today for clarity. If doves make an appearance once again and nothing new is brought to the table, the dollar is likely to find itself under renewed selling pressure, as traders reduce their bets on an additional interest rate hike this year.
Sterling rescued by a BoE hawk
Sterling bulls were offered a helping hand during Thursday’s trading session, as hawkish comments from BoE policymaker Ian McCafferty supported bets for higher UK interest rates. McCafferty was one of the hawks who voted for an interest rate increase last month and suggested that the central bank should consider unwinding its £435 billion Quantitative Easing programme earlier than planned. Although the weak dollar played a part in the British Pound/U.S. dollar (GBPUSD) currency pair’s impressive appreciation on Thursday, price action suggests that Sterling is becoming increasingly sensitive to monetary policy expectations.
While speculations of the Bank of England tightening monetary policy may support prices in the short term, the fundamentals pressuring Sterling still remain intact. With Brexit uncertainty deteriorating economic fundamentals and political risk all weighing heavily on the British Pound, further downside may be on the cards. From a technical standpoint, the GBP/USD remains in a wide range on the daily charts. Bears still have some level of control below the tough 1.3000 resistance.
Commodity spotlight – gold
Gold prices edged higher on Wednesday after Fed Chair Janet Yellen adopted a dovish stance in testimony before Congress. A vulnerable dollar complimented the metals upside with prices hovering around $1,220 at the time of writing. With Yellen’s tone of caution prompting investors to trim their bets on another U.S. rate increase this year, gold, which is zero-yielding, was offered a lifeline. Although the metal remains heavily pressured on the daily charts, bulls could be given an opportunity to shine if Yellen doubles down on Wednesday’s dovish remarks when she appears before Congress this afternoon. From a technical standpoint, repeated weakness below the $1,240 resistance is likely to encourage a further decline back towards $1,200.