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The Fed Chair was keen not to cause any upset in markets last night, in contrast to March when her press conference pronouncements added around 1% to the dollar. This time, there were a mix of different messages, lower growth for this year, minimal upward revisions to inflation projections, together with lower long-term equilibrium levels for Fed Funds. Taking all this together, the dollar was weaker and stocks made new highs for the year (S&P 500), so if anything there was a sign of relief that she did not set a more hawkish tone. We’ve seen some further follow-through on the weaker dollar at the start of the European session, with AUDUSD above 0.94, cable above 1.70 and EURUSD back above 1.36. We’ve also seen volatility decline further, in the form of the VIX and bond yields lower. For want of a better phrase, this all suggests that we’re back into a risk-on environment.
Sterling remains in focus ahead of retail sales data today, which are expected to show a partial reversal (down 0.6%) of the strong rise seen in the April data (up 1.8%). The key focus here though is the growing debate about the timing of the first rate hike, with yesterday’s minutes backing up Carney’s comments of last week that they could come earlier than the market anticipated. This had already been factored into the price, with sterling slightly softer on the fact that no-one was voting for a hike in June. All that said though, we’ve seen a huge reversal in the past six months, with the UK now expected to put rates up before the US, in sharp contrast to the prevailing view at the turn of the year. Naturally this is reflected in sterling which has rallied sharply this year, but the convergence play could still have some way to run given the potential for policy divergence.

Further reading:

US Dollar Remains At Risk Versus The Japanese Yen Post FOMC

UK retail sales drop 0.5% – GBP/USD dips below 1.70