Market News & Insights
22 November 2013

Yellen Looks to Spread Her Wings

EUR/USD 1.3513
GBP/USD 1.6194
GBP/EUR 1.1984 (0.8343)
EUR/CHF 1.2314
GBP/CHF 1.4757
GBP/AUD 1.7628

Yesterday, Janet Yellen cleared another hurdle to becoming the first woman to lead the Fed chair role after receiving backing from the Senate panel. Yellen looks like she’ll start the role as Bernanke has finished, as she echoed her predecessors ‘dovish ’policy stance at the Senate hearing earlier this month. Since 2008, the US has held interest rates close to zero and has quadrupled the size of its balance sheet to $3.9 trillion through three massive asset purchase campaigns.

Yellen will have her work cut out for when the US begins to tighten its spending policy and begin tapering. Thursday’s data releases out of the US looked to continue to bring forward this tightening, via falling unemployment and an improving manufacturing sector. US factory expansion picked up yesterday as PMI data came in at 54.3 vs. 51.8 expected, and up 2.5 from October’s final reading. Weekly Unemployment claims also declined to the lowest level in almost two months, showing further healing in the labour market as the figure dropped by 21k to 323k.

However, US producer prices fell for a second straight month in October, indicating inflation pressures still remains and could likely see Yellen and the Fed sticking to its monthly $85 billion bond-buying program as it tries to stimulate demand through low interest rates.

Yesterday’s data releases out of the Eurozone again saw German strength and Eurozone weakness. German PMI Manufacturing data hit its highest level in almost two and a half years posting 54.3, up from 53.2 in October. However it was a different story for the Eurozone where the same data figure fell to 51.5 in November, down from 51.9 in October, and missing the expected figure of 52.0. This unexpected fall is prompting concerns that the Eurozone economic recovery is losing steam.

Draghi has been busy over the last two days, yesterday saw him in Berlin where he quashed any the notion of reducing the deposit rate to -0.1% admitting that although negative rates were discussed at the previous meeting, there was no follow through on it. Today see him speaking again, this time in Frankfurt, we will look to get a better indication from him on the back of yesterday’s disappointing data.

To the UK and we again saw positive signs of their continued recovery, as public finances improved again in October. The deficit fell to GBP 8.1 bln, from 8.2 bln in October 2012. However BOE chief economist Spencer Dale threw a damp towel on the fire yesterday stating the UK recovery will take “a number of years”. He also stated that interest rates will remain low for what he termed a “sustained period”.