Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the speech by Fed Chair Yellen on Friday was bearish for the USD, offering a rationale for allowing the US economy to run hot and take more risk of higher inflation.
“This would imply that the Fed will be slow to hike rates in the face of improving economic data and higher inflation. It should point to lower short to medium term rates and higher long-term rates. This was reflected in the price action on Friday with some twist in the yield curve.
On Friday, the University of Michigan Consumer sentiment survey showed a fall in confidence and a fall in long-term inflation expectations. If not for the Yellen speech, this may have led to a fall in US yields across the curve.
The speech by Yellen will do little to change the outlook for a December rate hike, but is likely to feed a growing expectation that the Fed will be slow to hike rates through the cycle. If the US economy starts to reveal a stronger growth momentum it will probably perpetuate a rising trend in global bond yields and support higher inflation expectations.
This may tend to perpetuate the recent trend towards a weaker EUR and JPY and relatively strong, if not outright strength, in commodity currencies.
However, higher global bond yields may also tend to undermine currencies that have relied on flows into their bond market from investors seeking higher yield in an, until recent weeks, diminishing global yield environment.”