Market News & Insights
14 November 2013

Yellen talks Down USD but Boosts Risk Appetite

EUR/USD 1.3454
GBP/USD 1.5992
GBP/EUR 1.1885 (0.8410)
EUR/CHF 1.2331
GBP/CHF 1.4657
GBP/AUD 1.7200

Yesterday we commented that GBP had been facing selling pressure this week and the inflation report and employment data would provide GBP with an opportunity to claw back some of it lost ground and we were not disappointed. The pound started its move following stronger than expected employment data, with the BOE’s forward guidance closely linked to employment (looking for 7% before they begin to discuss rate increases) any release better than expected could provide a temporary lift. Whilst the unemployment rate fell as expected to 7.6%, down from 7.7% in September the lift came from better than expected Jobless claims, down 41.7k versus -30k expected.

This led nicely into the BOE’s growth and inflation report, and an update on their forward guidance policy. There is no question that since Mark Carney has taken office things could not be going better, compare this to the torrid last couple of years experienced by his predecessor Mervyn King, Carney linking his “luck” to his Irish heritage.

In the inflation report the BOE upgraded their GDP forecasts, and brought forward their target date for unemployment to hit 7% to Q3 2015 from 2016, however they lowered their inflation forecasts which may delay any possible rate increase. Overall this was in line with market expectations, we’ve often mentioned real market interest rates were suggesting a 2015 interest rate increase and yesterday’s guidance simply brings this back in line with market expectations. Carney did however strike a cautious tone, and emphasised that rate increases would only be discussed once the unemployment rate hit 7% and inflation was in line.

The USD faced selling pressure of its own following the release of Janet Yellens testimony. Yellen is the lead nomination to take control of the Fed next February when Bernanke steps down and her testimony struck a cautious tone, and was more dovish than expected. Yellen is a known dove and a firm believer in employment led growth, her target levels could well be lower than the current Fed target and the risk of lower rates for longer and continued QE have provided a boost for risk markets but the USD was under some pressure. Her nomination hearing continues today and will likely be watched closely for any further clues on potential Fed policy.

The Euro was led by other forces yesterday and had little reaction to a weak monthly industrial production figure. Today’s Eurozone Q3 GDP releases will garnish more attention. Thus far releases have been mixed with Germany coming in as expected at .3% in Q3, .6% YoY, France missed posting a .1% decline in growth in Q3, bring the YoY figure to .2% from .3%. Italy came in as expected but the Eurozone figure is expected to be .1% growth in Q3, -.3% YoY. anything less than this will put the single currency under further selling pressure.