Jane Foley, Research Analyst at Rabobank, suggests that the cautious sentiments of Fed Chair Yellen yesterday has certainly provided salve for risky assets. Key Quotes “However, investors should also be paying heed to the reasons behind her guarded tone. Seven years on from the global financial crisis, the world economy is still being drip fed on extraordinarily accommodative monetary policy settings from the world’s major central banks. Yet, even with this support global growth is still sluggish. The promise of cheap money may be a support to market sentiment but unless this translates into a pick-up in demand, asset prices will remain vulnerable to a potential correction. As Yellen noted yesterday US “consumer spending appears to be expanding at a moderate pace, driven by solid income gains, improved household balance sheets, and the ongoing effects of the increases in wealth and declines in oil prices over the past few years”. Yesterday’s release of March consumer confidence data brought an upward surprise indicating the potential for further support from domestic demand. That said, even though the US economy is more closed than most others the weakness of US manufacturing and net export data is testament to its vulnerability to the combination of slow global growth and the past gains in the value of the USD. There are currently plenty of warnings about the prospect of weak US Q1 earnings growth. Despite the recovery in stocks and other risky assets since the middle of February, many investors appear to be taking steps to protect themselves in the event of another pull back in stock markets. Although the US economic is in recovery mode, the perceived downside risks are sufficiently great for the Fed Chair to have devoted a section of her speech yesterday to a discussion of how the FOMC may proceed if the Federal funds rate were to return to zero. There are plenty of inferences contained within Yellen’s speech which should provide investors reason to remain guarded. This suggests that safe haven currencies could be prevented from softening significantly in the coming months. USD/JPY pushed lower on the back of the broadly softer tone of the USD overnight. In the year to date, the JPY remains the best performing G10 currency after investors rushed into the JPY at the start of the year as concerns over Chinese growth peaked. We are anticipating a modest move higher this year towards USD/JPY116.00 on a 12 mth view. This forecast assumes that the US economy will be sufficiently strong to allow the Fed to hike potentially twice in 2016, which is in line with the Fed’s dot plot. A less constructive evolution of economic conditions clearly increase the upside risk for JPY.” For more information, read our latest forex news.