Just like Bob Marley’s Caution song, Yellen is doing her thing and doing it slow. Ahead of Thursday’s UK referendum, Yellen’s testimony to the Senate banking committee was the second big event of the week. Unsurprisingly, however, we got a similar message to the one we got from last week’s FOMC.

Yellen still believes economic developments will lead to a gradual tightening in monetary policy, but recent data releases have reinforced the case for moving with caution. The Fed Chair again decline to provide any specific timing on futures hikes and repeated her warning not to focus on one or two payroll reports. She also noted that wages “may finally be picking up”.

At the margin Yellen appeared to be a bit more cautious than before, but overall our assessment of the Fed remains unchanged. While a July Fed hike remains a statistical probability, it seems more likely the Fed now wants to see several data releases to convince themselves the May employment report was just noise. We still expect two Fed hikes this year albeit with clear risk we get no more than one (while all bets are off under Brexit).

While still under a light trading environment, risk assets had another positive night with Yellen’s testimony seemingly providing a small uptick in risk appetite. European equities closed higher for a third consecutive day and US equities notched up a second straight day of gains with energy shares leading the way. The USD is modestly stronger and core global yields are mostly a little bit higher.

The AUD and NZD have managed to hold their ground while most other currencies underperformed the USD. Early in the overnight session, the AUD briefly traded with a 75 handle and the NZD traded to a new year high (0.7169), however later in the session both currencies retraced their gains to be practical unchanged for the night. The Yen is the biggest underperformer against the USD, losing 0.88%. USDJPY is currently trading at ¥104.83 after reaching an overnight high of ¥105.06.

ECB Draghi was also speaking last night. Addressing the European Parliament, the ECB President reiterated his willingness to act in order to boost inflation, noting that Inflation dynamics in the euro area remain “rather subdued” even as the economic recovery “gained momentum at the start of the year”. Draghi’s comments contributed to the weakness in the EUR overnight. EUR/USD fell 0.5% and is currently trading at 1.1257.

The GBP continues to trade around UK EU referendum headlines. After trading to a high of 1.4783, GBP/USD lost some ground (-0.49%) following the latest IG/Survation poll which put Remain at 45% and leave at 44%. GBP now appears to be taking a breather after climbing almost five big figures since Thursday last week.

As for commodities, oil prices are little change, gold is down -1.9% and iron ore ended the day marginally lower (-0.4%) closing at $50.9.

Looking at data releases, Germany’s ZEW survey shrugged off Brexit fears with both the current and expectations reading printed at much better than expected levels. June investor expectations for June came at 19.2 vs 4.8 exp. and the current conditions index printed at 54.5 vs 53 exp.

Coming Up

Data releases are taking a back sit as we await the outcome of Friday’s UK referendum. But, for what it’s worth, locally today we have May skilled vacancies and early this afternoon, New Zealand releases its May credit card spending.

Later in the day, Europe prints its advance June consumer confidence reading followed by the US existing home sales reading for May.

As for Fed speakers, Yellen testifies on monetary policy to the House committee ( same speech as last night, but different Q&A)and later in the evening Fed Governor Powell makes introductory remarks at a function hosted by the New York Fed.

Overnight

On global stock markets, the S&P 500 was +0.27%. Bond markets saw US 10-years +1.73bp to 1.71%. In commodities, Brent crude oil +1.05% to $50.94, gold-1.9% to $1,266, iron ore -0.4% to $50.87. AUD is at 0.7449 and the range since yesterday 5pm Sydney time is 0.7449 to 0.751.

Good luck.

For full analysis, download report:

•  Markets Today: 22 June 2016 (PDF, 100kb)

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