US Equities Rally on “Dovish” Yellen”

Yellen took a more dovish tone than was widely anticipated during her testimony before the Congress on Wednesday, emphasizing the Central Bank’s objective of gradually normalizing monetary policy.  In addition, she expressed a degree of optimism about the state of the US economy. Specifically, Yellen said interest rates did not need to rise much higher to achieve the Bank's monetary policy goals.

Following the latest speech, the likelihood of a September rate hike has been greatly reduced, with most economists now anticipating action during the December FOMC meeting. However, she did highlight the potential for tightening in the form of balance sheet reduction which may eventually prove negative for risk assets like stocks.  The tech-focused Nasdaq added 1.10% to end the previous trading session at 5799. Given the technical backdrop, the index could rally towards immediate resistance at 5850.

For the three months through the end of May, UK unemployment fell to a 42-year low, underlining the positive impact of accommodative policy measures.  However, in a disappointing development, inflation adjusted wages declined for the third straight month, indicating Britons were experiencing a squeeze in living standards despite a robust labor market. The jobless rate in the period between March and May slipped to 4.50%, the lowest level since 1975, trailing the average forecast of 4.60%.

An even more concerning aspect for Prime Minister Theresa May and her new government is -0.50% decline in real wages for the three months through May as consumer prices grew at a faster pace than earnings. EURGBP has rebounded from the strong support at 0.8840 to last trade around the 0.8850-mark.