Talking Points:

Dollar Drops after Leaked Yellen Comments Show QE Support
Euro at Risk Should Weak GDP Data Spur ECB Stimulus Wars
British Pound Rallies after BoE Report Opens Door to 2015 Hike

Dollar Drops after Leaked Yellen Comments Show QE Support
The markets were given a taste of how the likely next Fed Chair will guide the world’s largest stimulus program…and the dollar didn’t like it. In the lead up to Fed Vice Chair Janet Yellen’s confirmation testimony before the Senate Banking Committee today (15:00 GMT), the central bank released the contents of her prepared remarks. Traders have grown quite adept at deciphering central bank speak into practical trading application, and this particular account reinforced expectations of a persistent dovish tone. In the transcript, Yellen remarked that the housing sector had “turned a corner”, the auto industry has made a “comeback” and the economy generally “continues to improve”. Yet, the particular passage most jumped on was: “a strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases.”

This certainly maintains the overall cautious lean that the US central bank exhibited when it unexpectedly deferred the Taper at the September policy gathering, but how far does it go towards clarifying the time frame for the first downshift in the extraordinary $85 billion-per-month QE3 program? While some believe the statement suggested Yellen is suggesting further economic recovery is needed before any reductions in the stimulus program is even entertained, there was nothing so explicit on the time frame for the heavily debated and speculated QE program lifespan. That means the dispute over a December, January, March or later Taper shall continue.

Given S&P 500 futures only advanced another 5 points and the USDollar slipped an additional 31 points (less than half of the day’s decline), the market is certainly positioned for a more prolific adjustment via risk trends, relative stimulus performance or simple supply-and-demand concerns. In the hearing, the question and answer will no doubt assail the topic of both the need for stimulus and a near-term reduction – as there are Congressman and women of both beliefs. Yellen is practiced at deflecting questions that would draw outright speculation under most circumstances, but this event may very well give rate watchers – everyone fits into this category now – something to work with.

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Euro at Risk Should Weak GDP Data Spur ECB Stimulus Wars
The market has already taken a hard turn on its expectations for the Euro-area monetary policy and thereby the euro, but it seems that ECB is quickly moving up the ‘stimulus wars’ rankings. Along with the surprise benchmark interest rate cut this past week, ECB President Draghi stated that additional stimulus to support the financial and banking system were an explicit option should they be needed – much like the OMT (Outright Monetary Transactions) program is an untapped option in the event of surging sovereign yields. Simply having the tools doesn’t necessarily mean they will be used. Yet, the recent drop in the region’s inflation further exposes persistent gaps in growth and financial health. If the upcoming 3Q GDP readings reinforce a ‘need’ for nonstandard means of support, euro traders will likely act to preempt a change in policy.

British Pound Rallies after BoE Report Opens Door to 2015 Hike
Sterling bulls and rate hawks have actively contradicted the BoE (Bank of England) guidance for rates to remain at their current 0.50 percent low to 2016 that Governor Mark Carney offered up shortly after he took the group’s reins four months ago. Naturally, the skepticism translated into strength for the British pound and a particularly robust 1,400-plus pip drive for GBPUSD. So, when the BoE updated its forecasts with its Quarterly Inflation Report this past session with an admission that the 7.0 percent unemployment threshold could be met by 2015, many felt vindicated. That said, the market was already pricing in such a probability, so the surprise quotient – and thereby need to adjust – was low. Furthermore, Carney was using a page from the Fed playbook when he remarked that hitting 7.0 percent triggers a discussion, not a hike.

Yen Crosses Steady after 3Q GDP, Markets Want more Stimulus
The Bank of Japan has made a commitment to pursue stimulus until inflation reaches its 2 percent target and stays there. National headline inflation is 1.1 percent while the core (excluding volatile food and energy costs) reading is irksomely anchored at zero. This slow reaction given fundamental ammunition to investors who have become perturbed by the months of congestion that have set in for the Nikkei 225 and yen-based carry trades since May’s peak. The question on their minds is when will the policy authority decide it is time to do more? Around this time a year ago, the market was driving USDJPY higher on speculation of the eventual QE program in April. 3Q GDP was tepid, is it time?

New Zealand Dollar Jumps though Data Shows Carry Appetite Flagging
In an already active morning for FX trading, the New Zealand dollar stands out. The kiwi surged 60 pips versus the dollar and more than 130 pips versus the pound in early trade only to retrace those gains in a slow deflation. Positive ‘risk trends’ certainly has a hand in this performance, but so to does the New Zealand dollar’s own rate outlook – highest among the majors. In a busy morning for data, what stands out most was the foreign holdings of NZ bonds. A drop from 67 to 64.8 percent last month shows a material drop in carry demand despite the yield outlook…

US Oil Unable to Overtake $95 with Rebound, Discount to Brent at 7 Month High
With a positive (0.9 percent) performance from US oil this past session, we have now seen nine consecutive days where the market has flipped gain to loss and back again. That is typically a sign of congestion, but the dominant bear theme still holds here both technically and fundamentally. This past session, the EIA updated its 2014 global oil demand forecast to project an estimated 1.14 million barrels per day (previously 1.17). Meanwhile, the premium that UK-based brent holds over its WTI counterpart is its highest in 7 months ($13.33).

Gold’s Biggest Advance in Three Weeks Speaks to Weakness, Not Strength
Gold rallied 1.1 percent ($13.82) through Wednesday. While some bulls may be heartened by the fact that this was the biggest jump since October 22, it is more a testament to how persistent the bear theme has been for this commodity. On the occasion of this pickup, volume in futures and ETFs was light, and open interest for both slid. The metal’s issues are fundamental. With a medium-term (3-month) volatility reading nearly 8 percentage points higher than the equity-based VIX, there is a hesitance use it for its ‘safe haven’ properties. If Fed Chairman elect Yellen delivers on dovish hopes though, the metal may find strength in the dollar’s pain.**Bring the economic calendar to your charts with the DailyFX News App.

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