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Fed Chair Yellen Testimony and the US CPI Preview
We see risk to the dollar still skewed to the downside from both Yellen’s testimony and US CPI. We heard two Fed speakers yesterday (Harker and Brainard are voters) and both were dovish; Fed Harker comments to the WSJ were more surprising as he had earlier given more hawkish signals while Brainard comments were more or less as expected. USD and the US yields fell on these dovish comments which highlight market concern for dovish Fed talks. This is why we see USD vulnerable to a dovish Yellen. In the case of rhetoric on growth and balance sheet normalisation, it is unlikely that USD will rally as the investors have failed to be excited by these comments previously.
In any case, we see the US CPI on Friday to be a more important event than Yellen’s testimony today. Even a small inflation miss is likely to cause a USD adjustment to the downside as this development will nullify Fed earlier comments where they said that fall in inflation is transitory. We will need 0.1% and 0.2% headline and core inflation (as expected), respectively to keep USD from falling.