By Michael O’Neill, Agility Forex, Senior FX Analyst



“Janet Yellen set the bulls running during her speech at Jackson Hole.    Photo: Shutterstock

“I believe the case for an increase in the federal funds rate has strengthened in recent months”.  With these words, Janet Yellen, Chair of the US Federal Reserve kicked off the Jackson Hole, Wyoming, version of the “running of the bulls”.  And these bulls bought US dollars.

The US dollar immediately erased two days worth of losses against the G10 currencies and closed the week well above last week’s levels.  Only Sterling managed to rally and that has everything to do with Brexit and positioning.

The rate hawks are feeling vindicated.  Finally, after a couple of week’s of lesser-lights on the Federal Open Market Committee raising the possibility of a September rate increase, the Big Kahuna, herself has spoken.

Traders bumped up the odds for a September rate hike to 30% from 24% yesterday.  The probability of December rate increase rose to 45.1% from 41.4% in the same time frame.

Ms. Yellen isn’t the only FOMC member hinting at rate increases. Thursday, Kansas City Fed President Esther George, told Bloomberg that higher rates were warranted. That same day, Dallas Fed President, Robert Kaplan told CNBC that the case was strengthening for another rate increase. On Sunday, FOMC Vice Chair, Stanley Fisher said that the Committee was “close to our targets”.  He followed up those comments on Friday when he said Yellen’s speech was consistent with two rate hikes this year.

The FOMC members seem hawkish. Yet, traders are not drinking the Kool-Aid. The 30% probability of a rate hike in September, as determined by the CME FEDWatch Tool, means that 70% of traders don’t think US rates are going anywhere.

What they are really telling the Fed is “We don’t believe you”!

Their scepticism is warranted. On Thursday, the Wall Street Journal published an article “Years of Fed Missteps Fueled Disillusion” with the Economy and Washington”.

In the run-up to the June FOMC meeting, various Fed speakers primed the rate hike pump. The rate hike never happened and traders got burned.

The anticipation ahead of Ms. Yellen’s Jackson Hole speech was, for financial markets, no less intense than the frenzy surrounding the release of a new Star Wars movie.

In reality, this speech was really not that big a deal. Sure, it was the Fed Chairman speaking but she hadn’t been heard from in a while. This speech occurred after nearly three weeks of mixed to soft economic data (except for the nonfarm payrolls report) in the middle of summer when large numbers of market participants were on vacation. It is not a stretch to say that FX markets were directionless and merely treading water.

Ms. Yellen did not offer up anything new, either.  She emphasized again, that all rate decisions were data dependent.  She mentioned that business investment was soft.  She said that subdued foreign demand and the appreciation of the US dollar since 2014 continues to restrain exports.  She noted that inflation continues to run below the FOMC’s 2% objective. She also dropped her “get out of jail free” card in the form of “as ever, the economic outlook is uncertain and monetary policy is not on a pre-set course”.

The next FOMC meeting isn’t until September 21.  What happens if non farm payrolls (NFP) falls below the 164,000 forecast? Would that be enough to derail a rate increase?  How about if NFP is strong, but inflation is weak?

The US dollar rally following Ms. Yellen’s speech is not all that impressive. EURUSD remains well within its August trading range, as does USDJPY and USDCAD.

Janet Yellen said that the case for an increase in the federal funds rate has strengthened in recent months, but she didn’t say if was enough to tip the scales or even hint at when it will occur. The September 2 employment report will be key.