• Yellen hints rate hikes are on hold In her testimony yesterday, the Fed Chair implied that near-term US rate hikes are currently on hold, in the light of the continued market turmoil. She stated that financial conditions in the US have become less supportive of growth, with the selloff in equities and further appreciation of the dollar. If the financial market turmoil continues, it could weigh on the economic activity and the labor market. Chair Yellen acknowledged the uncertain outlook surrounding the Chinese slowdown, heightened financial volatility and lower commodity prices. All these affect the demand for US exports by EM economies and pose downside risks to the economic outlook. The Fed chief tried to keep a balanced stance by citing continued improvements in the economy and specifically the labour market. While not giving any clear signals for near-term hikes, her focus on downside risks was enough to completely wipe out investor expectations for a March hike. The overall tone of her testimony suggested that the global turmoil is only a temporary setback to the normalization path, and that the Fed’s overall course of gradually raising rates remains unchanged. Today, Chair Yellen will deliver the same speech as she did on Wednesday, but this time to the Senate. The focus will thus shift to the QnA session, for any questions that provide further understanding of what to expect from the Fed during the rest of the year. Any shift in the Chairwoman’s balanced tone from yesterday, could determine the dollar’s near-term direction.
• Riksbank’s finger on the trigger Sweden’s Riksbank gathers today to decide on monetary policy. On the 4th of January, the Bank held an extraordinary policy meeting. At that meeting, the Governor and Deputy Governor were granted powers to intervene in the currency market to safeguard the upturn of inflation from a possible rapid appreciation of the krona. However, the krona is almost unchanged vs USD and has weakened significantly against the EUR since January’s meeting. As such, we believe that the current level of SEK is not strong enough to sound the alarm for currency intervention yet. This could happen and become necessary if the currency appreciates too quickly. In the prospect of further easing by the ECB in March, we believe that the Riksbank will try to offset any possible action from the ECB by pre-emptively reducing the repo rate or extending its QE program. As for the forecasts, we expect the main change will be a downward revision of the inflation forecast, to account for the latest fall in oil prices. In such an event, the probability for further easing throughout the year may increase considerably, which could weaken SEK. Besides the rate decision, Sweden’s PES unemployment rate for January is due to be released, though no forecast is available.
• As for today’s indicators, from the US, initial jobless claims for the week ended February 5th are expected to have declined, which would decrease the 4-week moving average somewhat as well.
• We have three speakers on Thursday’s agenda. Besides Fed Chair Yellen, Riksbank Governor Stefan Ingves will hold a press conference following the monetary policy decision. ECB Governing Council member Erkki Liikanen speaks as well.