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Market Awaits Signals from US Fed

UK industrial production data from today has shown a December fall by 1.1% MoM after a 0.8% fall in November. The indicator is down 0.4% YoY, whilst it was expected to fall by 0.2% MoM and grow 1% YoY.

The fall in industrial production was mostly provoked by a fall in production on part of the mining industry which is down significantly in the oil and gas sectors. The sector involved in extraction of energy from the North Sea experienced significant difficulties throughout most of 2015 due to the fall in the price of oil.

Nevertheless, the pound is up despite the poor production data, rising to 1.4530 against the dollar and with the euro trading for 0.7751 pounds.

Janet Yellen’s speech before Congress is at the centre of attention today and this will be the Fed chief’s first speech for eight weeks. It’s likely that she will speak about the ambiguous economic situation which has forced the Fed to take a more reserved and cautious approach with regards to interest rate rises this year.

Yellen is likely to mention that the Fed will take decisions according to the data that comes out, watching financial market developments. There is reason to be pessimistic though: signals of companies’ and consumer inflation expectations are down, meaning the Fed will find it harder to reach its 2% target level of inflation.

The dollar could gather pace if Yellen gives signal of the regulator being more inclined to increase rates. Any hint of this will give more trust to the Fed after its December rise. At the same time, a change of position from the Fed will mean a blight on its reputation in the eyes of the market.

If Yellen does indeed indicate a leaning towards another loosening of monetary policy due to financial market instability, investors will see this as a signal of the Fed abstaining from making any move before June and this will see the dollar lose out. The trading range for the euro/dollar is 1.1150-1.1350. However, don’t exclude a neutral tone from the Fed governor and an accompanying insignificant market reaction.

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