An unexpectedly hawkish Janet Yellen caught investors by surprise yesterday when she reiterated her comments that waiting too long to raise rates would be unwise, though she also acknowledged that the path around fiscal policy remained unclear. Nonetheless bond yields inched back up and the US dollar rallied as the Fed chief delivered a fairly upbeat economic message to US lawmakers.

It would appear that while investors had priced out the prospect of a move on rates in March the Fed, not unreasonably wants to keep the markets guessing, but it was always likely that the Fed would want to keep its policy options open, fiscal policy uncertainties notwithstanding.

Despite all of yesterday’s chatter a rate rise in March seems no more or less likely than it was at the beginning of the week. For all of President Trump’s talk of a “phenomenal” plan on tax it’s unlikely that we’ll see significant details by the March meeting.

Today’s testimony is unlikely to be that much different albeit to a different audience, and the House financial services committee.

Nonetheless US stocks continued their moves higher closing at new record highs once again and finishing higher for the fifth day in a row.

This positive finish is likely to see markets here in Europe open higher this morning with another busy day of data for markets to digest.

The pound had a disappointing day yesterday after the latest CPI inflation data came in slightly below expectations at 1.8% for January. The number still represented the highest level since June 2014, but was softer than the consensus of 1.9% and to some extent reinforces the recent dovishness that we saw in the recent quarterly inflation report.

The market reaction does rather ignore the fact that PPI input prices jumped more than expected, rising 20.5%, to their highest levels since 2008, and well above expectations of a rise of 18.5%. This raises the broader question as to how much of these rising costs will get absorbed within the supply chain and how much will eventually trickle down into consumer’s pockets. The likelihood of higher inflation still remains a clear and present concern.

Today we get a look at the health of the UK labour market as well as the resilience of the latest wages data. With inflationary pressures starting to catch alight it is especially important that wages data keeps up, having been running ahead of inflation since mid-2014.

In its most recent inflation report the Bank of England suggested that the long term equilibrium unemployment rate was actually at a much lower rate of 4.5%, hence the lack of traction in wage growth. Whether this is accurate or not the amount of slack in the UK economy will determine whether or not wages start to push up to the 3% level in the coming months.

Average earnings are expected to remain steady at 2.7% for the three months to December, while the ILO unemployment data up until December is also expected to remain steady at 4.8%.

While UK inflation came in higher yesterday it is also apparent that inflationary pressure is also building elsewhere in the global economy. In Asia yesterday morning Chinese factory gate prices rose to their highest levels since 2011, coming in at 6.9%, and up 7.7% since last August, while headline CPI also rose more than expected, coming in at 2.5%. Two years ago there was significant concern that China was exporting deflation across the world, and now it looks like China is exporting inflation in equal measure.

Today the latest US CPI numbers for January are expected to show a similar pattern, coming in at 2.4%, up from 2.1%.

The US consumer has, in recent months shown increasing resilience and the retail sales have reflected that, with a strong performance in Q4. As 2017 gets underway the latest January numbers are likely to show a moderation from the 0.6% rise seen in December, with a rise of 0.1% expected.

EURUSD – continues to look soft having slid below the 50 day MA at 1.0600 the risk is we slide back to the 1.0460 area. Resistance lies back at the 1.0720 area.

GBPUSD – the 50 day MA at 1.2410 remains a key support despite last week’s brief round trip to 1.2350. A move above the high last week of 1.2580 retargets the 1.2700 area.

EURGBP – currently holding above the 200 day MA at 0.8450 which remains a key support, with a break retargeting the 0.8300 area. Only a move back through the 0.8570/80 area has the potential to stabilise.

USDJPY – we’ve pushed above 114.30 and could well drift back to the 115.20 level in the short term. It feels like we could be trading in a broad range between 111 and 115.50 in the medium term. Support remains back down at the 111.60 area.

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