FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar is continuing to strengthen heading into today’s ECB monetary policy meeting as evident by the dollar index recording a new cyclical high overnight. Key Quotes “The US dollar derived support yesterday from the release of the stronger than expected ADP survey which estimated that private employment increased by 217k in November. It provides further reassurance that employment weakness in August and September was likely temporary and that the underlying trend for employment growth remains solid at a round 200k jobs/month.” “The US dollar is continuing to strengthen supported by widening yield spreads in favour of the US. The speech yesterday from Fed Chair Yellen reiterated that the Fed is likely to begin gradually raising interest this month. The US economy was described as having “recovered substantially” since the Great Recession with the unemployment rate now close to FOMC participants’ median estimates of its longer run normal level.” “Recent employment growth was described as still sufficient to be consistent with continued improvement in the labour market signalling that the Fed is confident that it can begin to tighten policy. Chair Yellen has been further encouraged recently by the “welcome pickup in the growth rate of average hourly earnings for all employees and of compensation per hour in the business sector, although it remains too soon to confidently conclude it is a sustained pick up.” “Fed Chair Yellen expects the US economy to continue expanding moderately over the next several years which she judges will be sufficient to lift inflation back towards their 2% objective. She estimates that the underlying rate of inflation is currently running between 1.5% and 1.75% when temporary disinflation impact from the stronger US dollar and lower oil prices are eliminated. The disinflationary impact from these factors is expected to dissipate next year which when combined with some upward pressure from a further tightening in US labour and product markets supports Chair Yellen’s view that inflation will return to their goal.” “In these circumstances, it remains likely that Fed will begin to raise interest rates this month. Fed Chair Yellen reiterated as well that the pace of tightening is likely to be gradual and remain data dependent. Stronger growth or a more rapid increase in inflation would suggest the neutral Fed funds rate is rising more quickly supporting a faster pace of tightening, and vice versa. Fed Chair Yellen concluded by stating that “given the shortfall in inflation from our 2% objective, the FOMC will, of course, carefully monitor “actual” progress towards our inflation goal as we make the decisions over time on the appropriate path for the Fed funds rate” has drawn some market attention although to us it sounds more like a statement of the obvious.” For more information, read our latest forex news.