Dollar Slumps After Yellen Offers Only A Defence Of Regulation

Price action in the aftermath suggests some may have been sat on the sidelines in fear of a hawkish message from the Fed chair at Jackson Hole.

The dollar slumped in London during noon trading after Federal Reserve chairwoman Janet Yellen offered little more than a defence of post-crisis financial regulation in her eagerly anticipated speech at the Jackson Hole symposium.

Price action in the aftermath of the speech suggests some traders may have been sat on the sidelines during recent days for fear of being caught on the hop by a hawkish message from Yellen.

The US dollar index fell nearly 50 points in the wake of the speech text having been released, to be quoted at month long low of 92.80, while the EUR/USD exchange rate surged nearly 70 points to reach 1.1860.

The pound sterling also rounded convincingly on the greenback, with the GBP/USD exchange rate adding 70 points to be reach 1.2882.

“Yellen's remarks appeared aimed squarely at Republicans in Congress and the White House who are aiming to push back against the regulatory tightening imposed after the financial crisis,” says Avery Shenfel from the economics team at CIBC Capital Markets.

With the Federal Reserve out of the way, all eyes now turn to European Central Bank chief Mario Draghi, who will speak at 20:00 London time.

Traders have focused intensely this week on how Mario Draghi will use his Jackson Hole speech. Some have speculated that he might attempt to jawbone the euro back from recent peaks, given that a strong currency can counter inflation, which would offset much of the work done by the ECB.

“So we wait to hear if Draghi will add to the comments in the ECB minutes suggesting concern over the EUR overshooting. The ECB obviously would prefer stability in the markets if and when they taper their QE programme and look to take rates back out of negative territory as the economy recovers and stabilises,” says Robin Wilkin, a global cross asset strategist at Lloyds Bank.

However, others have suggested he might use the speech to reinforce a more hawkish message sent out to the market in June, possibly hinting of a further tapering of the ECB's quantitative easing program later in the year.

“Beyond Jackson Hole, attention will quickly shift to the US debt ceiling; comments from President Trump indicate negotiations are contentious,” says Sue Trinh, an FX strategist at Royal Bank of Canada.

President Trump threatened lawmakers with a government shutdown earlier this week if Senate Republicans cannot agree a bill that provides funding for the controversial Mexico border-wall to begin. He could do this by refusing to sign any bill that comes to his desk without the provision.

A government shutdown would occur when the debt ceiling, a self-imposed legislative limit on how much debt the US can have, gets hit and lawmakers have not agreed to extend the limit.

The debt ceiling is an emergency that allows the US Treasury to conserve cash in order to continue meeting sovereign debt payments. Analysts expect that it will get hit some time in October.