FXstreet.com (Barcelona) - A massive run to cover USD longs has been taking place late US session, after Yellen opened the can of worms suggesting the improvements seen in the US labour market are not enough to start the tapering process.
The announcement should not come as a surprise, as Yellen has always erred on the side of the dovish camp since the beginning of the GFC back in 2008. However, the upbeat NFP report from last Friday (+204k) led to a brief restoration of faith that the tapering could indeed be initiated next December. As a result, the spec community added USD longs which as seen time and time again, have had to be unwound yet again in the past hour on the realization of 'no-Dec tapering.'
Not to say that Yellen statement is a big turnaround in the fortunes of USD buyers would be an understatement, and while the technical breakouts in favour of the American currency still argue for a constructive stance, the risk of a counter-technical damage in growing. Against the Euro, the pair has regained 1.3470 and is threatening further gains in Asia.
We are seeing a glimmer of truth in Janet Yellen's statement.
The US economy, fragile as it is, is in no condition to weather the reality of bond market tapering and the higher yields it implies.
While bond yields have been moving higher lately, it is certainly possible that the Fed is worried that even a modest increase in rates will kill any signs of recovery, particularly in the housing sector.
So despite all the taper talk, as we have suspected for some time, the Fed is likely to stay the course with bond buying, and even increase it if conditions warrant.
This is the type of environment that should lay a strong foundation for a gold rally.
Let's see what tomorrow and Friday bring....