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Upside inflation shocks not Yellen's base case - ANZ

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 30, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Analysts at ANZ noted that after hawkish commentary from a number of FOMC voting members last week, Fed Chair Janet Yellen largely reiterated her dovish position following the March FOMC meeting where the Fed cut back its expectations for rate hikes for 2016 to two from four.

    Key Quotes:

    "Her comments buoyed markets overnight – the AUD surged on the news and is trading at USD0.7633 at the time of writing. While labour market conditions and housing activity indicators have improved markedly, the FOMC remains wary of the global risks surrounding the transition underway in China and the impact of commodity prices on financial markets.

    Yellen conceded that inflation could surprise on the upside, but this isn’t her base case. However, we believe the risk of inflation moving towards the Fed’s 2% objective quicker than the central bank thinks is growing.

    If this is correct, this could require an even speedier adjustment in the rate of normalisation. That said, it’s also clear the Fed is wary about the negative feedback loop between its policy tightening and overall global financial conditions. Yellen noted that with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy on the way down is constrained.

    Kaplan (non-voter) also spoke overnight, reiterating the dovish tone but nonetheless remaining cognisant that “there are costs to having excessive accommodation”."
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