Yellen kick started her term as Fed Chair surprising the markets as more of a hawk instead of dove. As expected the Fed continued with winding down asset purchases by $10 but what was unforeseen was the revision to the median forecast of the Fed’s fund rate, from 0.75% to 1% by the end of 2015. More importantly Yellen’s response to a question about what “considerable” meant in the Fed statement which claimed rates would remain low “for a considerable time”, really caught the market of guard. “Something on the order of around six months, or that type of thing” was her response, which suggests that we could see tightening of policy by spring 2015- far sooner than thought.
The market was under the impression interest rates will remain low through the majority of 2015, but Yellen’s comments imply we could see higher rates around the same time as expected from the BoE. Cable (GBPUSD) fell on the back of these comments, and with the prospect of a rate hike in the first half of 2015 now in play and QE tapering already underway, the slide in cable may finally begin to take hold.
Sasha Nugent
Currency Analyst
