This week’s main event will be Yellen’s Humphrey HAWKins (as RBC bluntly put it) testimony in Congress starting on Valentine’s Day in the House and continuing into Wednesday.
According to Bank of America, the market is underpricing the risk of a March hike. The bank’s reasoning is that based on the view that with market pricing around 25% chance of a rate rise, Yellen may be tempted to try and increase those probabilities to close to 50% and make March live.
As BofA’s Ralf Preusser adds, it is hard to see how Yellen can deliver a message that is more dovish than what the market is already pricing.
Bloomberg’s Vincent Cignarella echoes the sentiment, writing that the dollar rally will also likely gain further momentum from Yellen’s testimony next week if the Chair leans hawkish, adding that That would probably raise the probability of a March rate hike closer to 50% from current odds of about 30%. Recently BlackRock Inc.’s Rick Reider said a March rate hike “is on the table,†given the Fed is close to its dual mandate on employment and inflation with the U.S. economy expanding.
Additionally, what’s sandwiched between Janet Yellen’s congressional testimony may prove to be just as important for currency and bond markets and may prove to be the “tiebreaker” when it comes to keeping the Trump reflation trade afloat according to the Bloomberg FX strategist. Even after President Donald Trump’s promise of a “phenomenal†tax plan helped send the dollar to its first weekly gain since December and triggered a resumption of risk-on sentiment, doubts remain over whether growth is strong enough for the Federal Reserve to tighten as much as has forecast for this year.
Trump’s pledge that his tax plan would come in two-to-three weeks lines up around when the so-called State of the Union address would likely take place, giving the former reality TV star a possible automatic prime-time national platform. That may be enough to maintain the dollar optimism in the meantime.
