Focus today will be on the first of the two Yellen speeches this week. The Fed chair will be talking at the Economic Club in Washington on the economic outlook. On Thursday, Yellen will be speaking on the US economy before the congressional Joint Economic committee. The speeches could attract considerable attention ahead of the December FOMC meeting.
With markets already pricing in a December lift-off, the two speeches will be scrutinized for evidence that the Fed will be very cautious hiking rates in coming months. Indeed, the spread between the Fed September dots and the rates implied by the Eurodollar contract strip has re-widened in recent weeks, hitting its widest level since September.
It seems that the rates markets are once again questioning the ability of the Fed to deliver aggressive tightening from here and this is in a stark contrast with the apparent resilience of USD of late. This makes the currency vulnerable to potential indications by the Fed Chair that the impact of strong USD on the economy is becoming a worry for the policy makers. Indeed, one of the reasons for the surge in the market USD-longs of late has been the lack of comments about USD from the Fed.
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