Yellen Emphasizes Need for Fed to Continue Gradual Rate Hikes

The highlight of the day on Tuesday was a speech by Fed Chair Janet Yellen. She essentially said that the Fed may have overstated the labor market’s strength and rate of inflation, indicating future monetary policy will be more accommodative than previously thought.

Yellen also said the case for a gradual pace of adjustment is strengthened in the face of “significant uncertainties.” She also said the Fed should be “wary of moving too gradually” especially since “persistently easy monetary policy” might have “adverse implications for financial stability.”

Fed Chair Janet Yellen emphasized that the Federal Reserve needs to continue to continue gradual rate hikes despite broad uncertainty about the path of inflation. Finally, she added it “would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.”

U.S. Dollar and Forex

The U.S. Dollar was underpinned on Tuesday by both a weaker Euro and the somewhat hawkish remarks from Fed Chair Yellen. The Euro remained under pressure due to political uncertainty in Germany stemming from mixed election results over the week-end. The dollar was driven higher by Yellen’s remarks on the need to continue with rate hikes.

Yellen’s comments combined with a rise in U.S. Treasury yields and reduced fears over North Korea helped make the U.S. Dollar a more attractive investment.

Gold

Gold price tumbled more than 1 percent on Tuesday in reaction to Yellen’s hawkish tone. Rising interest rates tend to drive up U.S. Treasury yields which in turn boost the U.S. Dollar while pressuring foreign demand for dollar-denominated commodities like gold.

Investors also sold so-called safe haven assets like gold as tensions eased between the U.S. and North Korea for at least one day. However, investors should note that the concerns over North Korea remain elevated.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil rallied early in the session on Tuesday in reaction to a threat by Turkey to cut crude exports from Iraq’s Kurdistan region as well as signs that the market rebalancing is accelerating. However, long investors decided to book profits on the rally, leading to a lower close.

According to reports, Turkish President Tayyip Erogan threatened on Monday to cut off the pipeline that carries 500,000 to 600,000 barrels of crude per day from northern Iraq to the Turkish port of Ceyhan.

This news combined with the OPEC and non-OPEC member program to reduce production by 1.8 million barrels per day has raised concerns of tighter supply. However, investors said this news may have been offset by a report from the U.S. Energy Information Administration that said production from wells in shale formations will rise for a 10^th month in a row in October.

Economic News

In economic news, according to the Conference Board, consumer confidence for September fell to 119.8 from 120.4 in August.

New Home Sales fell 3.4 percent in August, compared with expectations for a gain.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.9 percent annual gain in July, up from 5.8 percent the previous month and better than the 5.7 percent forecast.