Yellen: a little more hawkish than usual- ING

Analysts at ING pointed out that Chair Yellen sounded a little more hawkish than usual at the testimony before the Senate Banking Committee. They expect the US dollar to remain supported by higher US rates. 

Key Quotes: 

“Overall, Fed chair Yellen seemed to us to be a little more hawkish than usual – she re-iterated that waiting too long to hike rates could be unwise. She downplayed the uncertainty on fiscal policy as just one of the factors to take into consideration in rate setting, and she talked about the progress made towards the Fed’s longer run objectives. It certainly sounds as if a hike will be discussed in March. Whether it will be implemented or not remains an open question, but our non-consensus call for a March hike seems a little less ridiculous after this speech.”

“Yellen referred to wage inflation not as a direct influence on inflation, but as an indicator that the labour market was tight. Given recent rises, this suggests that the labour market is tight now. In our view, that means it is time to hike, not to wait until June. It is unclear that the Fed shares our view, however.”

“Looking ahead, we expect the dollar to remain supported from the (higher) US rates channel. From a market perspective, it seems that the Fed have laid their cards on the table and the onus now shifts to President Trump’s ‘phenomenal’ tax announcement in the next few weeks. 

“The modalities of any tax reforms matter for the size and extent of the dollar’s rally, though our general expectation is that the announcement will be dollar positive. USD/JPY will be the vehicle through which any positive US reflationary sentiment will be most acutely expressed; we see a strong chance of near-term move back up towards 116.”