Janet Yellen was hawkish in her testimony on the semiannual monetary policy report in Washington, focusing mostly on the risk associated with delays in the path of normalization. The Fed chair indicated that waiting too long to remove accommodation would be unwise and could potentially lead to a recession if the Fed were forced to raise rates rapidly down the road. Yellen did not provide a specific timeline for the next rate hike but stated that interest rate hikes were appropriate at upcoming meetings. There was a notable increase in rate expectations as priced in by the futures markets with the odds of a March increase jumping to 17.7% from the prior day pricing of 13.3%. There was an initial surge higher in expectations for June but odds have settled near 70% shortly after the speech, up from 65.3% priced in the prior day.
The US Dollar index (DXY) had advanced for a fourth consecutive day, boosted by US data and Yellen’s testimony. The Fed chair’s prepared statement warning of delays in raising rates caused a quick jump from 100.93 to 101.37 where a small range has formed. The index trades at fresh highs for the week and broke to three-week highs on Monday. The next major level of resistance is seen at the 61.8% Fibonacci level measured from 2001 highs to the 2008 low residing at 101.80. The level had previously held the index lower in November.
The US producer price index was reported to rise 0.6% in January coming in ahead of the analyst forecast for a rise of 0.3% and a 0.3% gain in the prior month. Excluding food and energy, the index rose 0.4% versus an expected rise of 0.2%. The data triggered an initial move lower in NZD/USD but losses as a result of the data were not sustained.