• Markets await for Yellen’s testimony Fed Chair Janet Yellen will take center stage today, as she delivers the semi-annual Humphrey-Hawkins testimony on monetary policy before Congress. She will repeat the testimony to the Senate the following day. Yellen’s comments will be closely monitored for fresh guidance on the Fed’s near-term plans. A lot has changed since the Fed raised rates in December, with renewed uncertainty about the global economic outlook and unrest in financial market. Earlier last week, Fed officials Fischer and Dudley stated that the FOMC will consider the impact of international developments on the US economy before deciding on interest rates. Based on these comments, the market scaled back its expectations for a March action. We believe that Fed Chair will acknowledge increased risks from abroad, but we also believe that she will sound confident on the domestic economy in order to leave the option for further hikes this year on the table. She could emphasize the positives of the US economy, especially the continuous strength in the job market. Although she will try to keep a balanced stance, we believe that she may be backed into a corner in the QnA session in order to give further hints on whether March is still in play. Any comments that wipe out the surviving hopes for a March hike could bring the greenback under further selling interest.
• Yen strength persists as Nikkei extends losses The Nikkei extended yesterday’s losses, and declined further amid concerns over the solvency of European banks and the stability of the global banking sector. The carnage in equities has led to increased demand for the Japanese currency, which held on to its recent gains to trade near 114 against its US counterpart. If we see the yen’s strength persist given this risk-off environment, the BoJ and government officials could come under increased pressure to depreciate the currency, as it could weaken the inflation outlook and the competitiveness of the Japanese firms. We expect this to happen through verbal interaction rather than currency intervention or policy changes, at least initially. If so, we could see JPY losing some of its recent steam, but should the global risk aversion persist the demand for the safe-haven asset should remain intact.
• As for today’s indicators, in Norway, the CPI rate for January is expected to have hit the Norges Bank target of 2.5% yoy from 2.3% yoy previously. Norway’s inflation remains higher than other European or major economies, while the rise in prices is attributed to the weakness in NOK during last year. Even though the krone entered 2016 on a strong note, the effects of last year’s tumble could continue to drive inflation higher in the next few months. A possible rise in the nation’s inflation rate could strengthen the krone, at least at the release.
• From the UK, we get the industrial production for December and expectations are for the figure to have fallen again, but at a slower pace than in the previous month. This will be an additional piece of information on how the British economy performed in Q4. In its calculation for the nation’s 1st estimate of Q4 GDP, the ONS reported that IP declined 0.2% mom in December, although the overall output had accelerated somewhat. A more-than-expected decline in today’s figure could raise some concerns for a downside revision in the 2nd estimate of GDP, which comes out on the 25th of the month.
• Besides Fed Chair Yellen we have two more speakers on the agenda: San Francisco Fed President John Williams and ECB Executive Board member Peter Praet.