Australian dollar in Fed Yellen’s hands

The Australian dollar is trading sharply lower today on the back of US dollar strength and expectations of a bullish speech this afternoon from Federal Reserve president Janet Yellen.

At 9.09am (GMT) the Aussie dollar was trading at US77.46c down from US78.00c at close of trade yesterday.

The US dollar has been somewhat range bound for the last few weeks but this could all change today as the market gears up for the timing of an interest rate rise in the US with most Analysts predicting the move will happen somewhere between March and June.

"The U.S. dollar has been in consolidation mode. If Janet Yellen comes out sounding fairly hawkish and suggests the rate hike cycle could start in the middle of the year, the dollar could rise," said ANZ senior currency strategist Khoon Goh

One indicator likely to concern the Fed is the current inflation rate in the US which currently sits under the central bank’s target of 2% due to a number of factors including tumbling oil prices and sluggish growth, with most expecting it to remain there for the foreseeable future.

Michael Carey, Chief Economist at Brittany Baumann noted that the Fed may choose to overlook this, pointing to the continuing strength of the labor market as well as strong underlying wage growth.

“On the inflation front, Chair Yellen will likely note that price inflation has moved further away from the Fed’s 2% target, largely reflecting the declines in energy prices. We expect her to underscore that inflation expectations remain relatively well anchored and hence the impact of lower energy prices is likely to be transitory but needs to be monitored carefully”.

He said “Confidence that core inflation will eventually firm towards the Fed’s goal would be strengthened by continued improvement in job market conditions and underlying real growth sufficient to support additional labor market gains and wage growth along with some pick-up in market-based inflation measures”. He also added.