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Yellen Testimony Proves Less Dovish

Dollar Climbs to New Multi-Year High as Fed Chair Hints at Forthcoming Action

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During her semiannual congressional testimony, Federal Reserve Chairwoman Janet Yellen was strong enough in her views to persuade financial markets that a rate hike remains a distinct possibility during the December meeting.  With few dovish points made during her testimony, more tightening for monetary policy may be in the pipeline, especially after the pickup recorded in inflation.

Rate Hike Odds Rise Further as Yellen Shifts Stance


In echoing her earlier comments about financial markets, Federal Reserve Chair Janet Yellen continued to highlight the potential for excessive risk-taking should rates remain on hold.  Her testimony, published before the Q&A with members of Congress, underscored the momentum of the US economy.  According to Yellen, GDP growth is expanding at a moderate pace while the labor market has some scope for further improvements.  Nevertheless, she underscored the risks of holding rates too low for too long, especially considering she things rate hikes may be appropriate “relatively soon.”  Her subsequent comments to lawmakers rarely referred to more dovish leanings of the Central Banker, suggesting that the path for raising rates in December was relatively clear as markets continue to speculate action to be forthcoming.  The result was a new multi-year high in the US dollar, with USDCHF reaching the highest point since February.

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Precious Metals Lower on Strengthening US Outlook


Gold prices are hovering just above the $1200 per troy ounce psychological support level as stronger US fundamental data combined with the US dollar’s climb reduce demand for haven assets.  The case for higher interest rates was bolstered in large part by comments from Janet Yellen alongside rising consumer headline inflation and blistering growth in housing starts.  Headline CPI climbed to 1.60%, marking the highest point since October of 2014 as shelter and energy costs drove the majority of the increase while falling food costs tempered the gains.  Taking markets by surprise was the 25.50% gain in US housing starts during the month of October compared to the -9.50% contraction reported a month earlier.  The result of the improved outlook for the economy was a renewed selloff in haven assets overnight, with silver prices hitting their lowest levels since early June.

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UK Retail Sales Hit 14-Month High


While the looming uncertainty of “Brexit” remains a drag on the outlook, consumers have not stopped spending according to the latest retail data.  October saw consumption in the United Kingdom pick up to the fastest annualized pace of growth in 14-years.  Headline retail sales rose by 7.40% year over year with the core figure climbing by 7.60% on the back of strong Halloween spending and winter clothing-related purchases.  Besides topping expectations by a wide margin, the retail figures give credence to the idea that more foreign shoppers are flocking to the UK after the steep devaluation in the Pound over the last few months.  The reason why this is likely is that spending gains are outpacing increases in wage growth.  Although higher versus the Euro, the Pound continues to give ground against the US dollar.

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European Inflation Still Not Self Sustaining


In spite of a positive inflation report on Thursday, the ongoing climb in consumer prices is not viewed as sustainable by all Central Bank officials.  According to European Central Bank Executive Board Member Yves Mersch, monetary stimulus is not intended to be a permanent solution.  He has called for ending the highly accommodative asset purchases as quickly as possible in an effort not to give governments the wrong financing incentives.  Headline European inflation printed at 0.50% on an annualized basis through the end of October while the core figure for the same period rose by 0.80%, matching expectations.  Although monthly CPI retreated on both a headline and core basis, there is optimism that inflation is gradually improving.  The key to the Euro’s outlook remains the December 8th decision when the ECB is expected to consider extending the asset purchase program through its March expiration.

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