Yellen’s prepared remarks showed that she is watching the developments in financial conditions and this may certainly slow down the path of rate hikes. Or if you wish: the stock market crash puts the Fed on the fence. However, she wasn’t overly dovish, especially given the drama in markets.

With bond markets not pricing in any hikes in 2016, the few positive words she had to say triggered some USD buying. This maybe-hawkish stance is supportive of the US dollar against commodity currencies and against the pound, but less against the euro and even less against the yen, with USD/JPY actually rising.

They still expect to raise rates gradually but the pace could be slower because of tighter market conditions:

Financial conditions in the United States have recently become less supportive of growth. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market

The Fed’s dual mandate is full employment and price stability.However, the latest jobs report was quite positive, with a drop in the unemployment rate to 4.9%. Inflation is expected to remain low in the short term.

She also noted that the commodity bust could indirectly hurt the US: suffering in other places because of commodities could hurt exports. However, it is uncertain according to the Fed Chair, that the volatility is temporary or could have a dampening effect.

Regarding the US economy, the view is still positive and warrants gradual tightening, and this may be the most hawkish part.

Currency Reactions

• EUR/USD dropped towards support at 1.1215, but bounced back relatively fast and is around 1.1240
• USD/JPY trades around 114.70. It actually fell from the highs just above 115 – a risk off reaction.
• GBP/USD makes a clear downwards move, losing around 70 pips to 1.4480 and erasing previous gains
• USD/CAD bounces from the lows to 1.3910.
• AUD/USD is sliding from the highs to 0.7088
• NZD/USD is at 0.6650, stable in range.

It’s interesting to see a stronger dollar despite the fact that Yellen mentions dollar strength could weigh on economic activity.

Here is how it looks on EUR/USD: