Fed Chair Yellen gave a speech on 'Inflation, uncertainty, and monetary policy' to the National Association for Business Economics. The speech ran through heightened uncertainties and scope for error in the Fed's forecasts of inflation, wage pressures and of the longer term neutral interest rate. The Fed Chief particularly emphasised the scope for the Fed to need to adjust its course as data evolves.  For Dr Yellen these uncertainties strengthen the case for a gradual pace of adjustments. Moving too quickly risks over adjusting policy (particularly 'in light of subdued inflation and a low neutral real interest rate') but the Fed Chief also cautioned on the risks of moving too gradually. At first glance, the speech appears to come across dovish but, depending on the data (on inflation particularly continuing to turn up), there is nothing here to imply she feels particularly uncomfortable with a December 2017 hike. Dr Yellen might, however, be less comfortable enacting three hikes next year as pencilled into the 'dot plot', whilst ramping up QE unwinding. The US dollar index strengthened 0.34% following Yellen’s speech.

Moving on to French President Macron’s speech yesterday. Macron expressed his ambitious vision for Europe, which he admitted will require support from Mrs Merkel, and that will be more challenging post the German election result. Macron said “Europe needs to be an economic and monetary power” that could rival China and US and that the “Europe we know (today) is too weak, too slow, too ineffective”. He outlined a range of proposals, including: the need for a common Eurozone budget and finance minister, common EU policies on defence, asylum and corporate tax rates, as well as the formation of European universities, a digital protection agency, border police, civil protection force as well as a common military intervention force. The reaction thus far from the rest of Europe has been mixed. It will be interesting to see if Macron can progress with his vision.

The European President Donald Tusk yesterday said that Brexit is about damage control, he also met with UK PM Theresa May and noted that there is “not sufficient progress yet” on Brexit talks and that PM May’s concessions don't go far enough, noting the “philosophy of having a cake and eating it is finally coming to an end”. A Bloomberg report highlighted that the Irish government’s preparation for Brexit expects the post Brexit transition period to extend beyond two years (flagged by PM May) to as much as five.

The day ahead

Looking at the day ahead we have a three more Fed speakers, including: Bullard, Brainard and Rosengren. We are also expecting to hear from President Trump on tax reform. 

Thought of the day

The Jaffa Cake is our quintessential national treat loved by one and all. Everyone on the desk was up in arms yesterday when we found at that instead of the usual 12 cakes there will only be 10 cakes in a packet. Now instead of one packet to cover all at tea time, we will need two, which means a few of us will need to help out and have two, so there is always a silver lining. After Janet Yellen’s speech last night we have seen the USD making grounds against most currencies this morning, as explained in our commentary above, if you have missed out on the recent GBPUSD and EURUSD highs and feel “two biscuits short of a full packet”, why not give the dealing desk a call on 0800 055 6339 so we can discuss your currency exposure and see how we can help.