Derek Halpenny, European Head of GMR at MUFG, suggests that we have the semi-annual testimony to Congress by Fed Chair Yellen, starting today in front of the House Financial Services Committee. Key Quotes “No doubt there will be a much greater focus on recent developments in the global financial markets given the deterioration since we last heard from Chair Yellen at the FOMC press conference in December when rates were raised for the first time since 2006. Since the turn of the year, the 2-year UST bond yield is over 30bps lower and the Dec 2016 fed funds futures contract has removed 45bps of monetary tightening from the market. The current price implies there is only a 50% probability that the next rate increase will come at the final meeting of 2016. So the market turmoil since the start of 2016 has removed considerably the expectations of rate increases. Currently the FOMC DOTS imply four rate increases and hence it is very likely that today’s testimony will to some degree acknowledge that the DOTS are no longer realistic. March is clearly off the table and we think, while April is possible, the most realistic next time to consider a hike is at the meeting on 15th June. So while today we are likely to hear about downside risks and the “headwinds” from abroad that could mean inflation remains lower for longer, we should also be prepared for an upbeat element to the testimony. Remember her audience today – one half of Congress dominated by Republicans who are more critical of Fed policy. Chair Yellen will be eager to emphasise that Fed policies, like QE, worked and that the economy is in a strong position. No doubt in Q&A the subject of negative interest rates will come up. While Yellen won’t rule the option out, she is also likely to thread carefully on expressing that step as possible – again the FOMC has just raised rates for the first time in nearly a decade and a strong signal of a reversal of that step is very unlikely. Furthermore, the current turmoil is not really rooted in the small rate increase in the US – it is more about concerns over weak global growth. Today is an opportunity for Chair Yellen to try and instil some confidence in the outlook for growth in the US. Certainly the JOLTS report yesterday, which saw the Quit Rate hit a new cyclical high of 2.1% is evidence of a further improvement in the jobs market and that wage pressures continue to build. While we expect Yellen to provide reasons for optimism, we suspect current market momentum against the dollar versus core G10 will mean the focus will be on Yellen’s concerns over low inflation remaining for longer and hence the dollar looks set for further depreciation over the short-term.” For more information, read our latest forex news.