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Dollar Softens with Yellen Tone

David Becker
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Dollar Softens with Yellen Tone

The dollar lost ground to the Euro on Thursday despite a week of stronger than expected data. The combination of robust retail sales, solid industrial production and increasing CPI was no match for Janet Yellens words which resonated within currency trading circles. Yellens dovish stance, will likely keep the dollar capped as the chances of increasing rates continue to be pushed out further along the curve.

Low inflation is a larger threat to the U.S. economy than rising prices, according to the Fed Chair. Yellen made this clear in her second public speech since taking the reins at the Fed. Yellen said the decision on tightening would hinge on the strength of the labor market and how quickly inflation is headed towards the Fed’s 2% goal. She noted wage gains to this point have remained muted, suggesting plenty of slack in the labor market. She was careful this time around not to allude to a timeline for a “considerable period” which causes interest rate markets to tighten in March.

Later in the day the Federal Reserve released its Beige Book which showed that consumer spending improved along with the weather. Reports from the 12 Federal Reserve Districts suggested economic activity increased in most regions, but Cleveland and St. Louis saw declines.

As interest rates in the US edged lower, the differential between the US and Europe lost ground allowing the EURUSD to gain traction. The currency pair is poised to test trend line resistance near the 1.39 level. A break of this would lead to the March highs near 1.3950. Support is seen near the 10-day moving average at 1.3815. The RSI (relative strength index) is moving higher with price action reflecting accelerating momentum while printing near 56, which is on the upper end of the neutral range.

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