After last week’s bullish comments from St-Louis Fed’s Bullard (the market is getting used to it), traders were not expecting much from Janet Yellen’s speech yesterday in New York. However, given yesterday’s very light calendar, Yellen’s dovish comments have had a strong effect on the US dollar. EUR/USD rose almost 1% in New York to around 1.13, GBP/USD surged 0.85% to 1.4975, while USD/JPY fell 0.90% to 112.60. The dollar index, a measure of the US currency against a weighted basket of its peers, tumbled 0.85% and tested the 95 support level.
The reiterated calls for a more cautious and data dependent approach triggered a rally in US sovereign bonds, pushing front-end yields to a 1-month low. The monetary policy sensitive 2-year treasury yields fell more than 6bps to 0.7880%, while it was testing the 1% threshold back in mid-March. The 5-year yields hit 1.2650% but quickly return to around 1.29%. EUR/USD is on its way to test the nearest resistance that lies at 1.1342 (high from March 17th); the following one stands at 1.1376 (high from February 11th). We still expect the pair to continue moving higher as we believe that the market has been misled by Fed’s hawks, while the Fed’s general tone has remained dovish since last December. However, one should also keep an eye on the ECB, which looks unfavourably on any EUR appreciation as it would prevent a return of inflation. Monetary easing is still very much on the table for the European Central Bank…………readmore.