Markets stir as Yellen eyes case for rate rise

European stock markets stirred Friday at the end of a tranquil week as Federal Reserve chief Janet Yellen indicated there was a case for raising US interest rates.

Market watchers were waiting for Yellen to show her hand in an address to an annual gathering of central bankers in Jackson Hole, Wyoming.

Noting strong US job growth, Yellen said gradual increases in the Fed's benchmark rate in the coming years should be expected.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said, according to prepared remarks.

European stocks advanced as news of her comments emerged with London and Frankfurt rising 0.3 per cent and Paris gaining 1.0 percent in late afternoon trading.

“The event we have been waiting for all week is finally upon us and all eyes will now be on Janet Yellen to see if she can deliver what investors so desperately crave: clarity on the near-term path of interest rates,” said Craig Erlam, analyst at Oanda trading group before Yellen's comments were released.

Thereafter, he added her views “didn't necessarily offer much in the way of surprises but it did confirm one thing -- there is now a clear and public hawkish consensus building within the Fed and Chair Yellen is on board” with regard to guidance on monetary policy.

Speculation has grown that the bank could lift interest rates as early as next month, although most experts say that is unlikely and that December or February would be safer bets.

With an interest rate hike unlikely in the immediate future, the dollar is struggling to gain traction.

Traders prefer to invest or hold currencies in nations where interest rates are rising — or expected to rise — in the hope of increasing their potential returns.

“Markets will most likely be looking at Yellen to provide some kind of guidance or insight into the likelihood of the Fed’s potential policy tightening before the end of the year,” said dealer Sam Budd at Currencies Direct.

“Any signals that suggest policy tightening before then could help strengthen the dollar and give it a boost. On the flip side, a cautious Yellen could lead to dollar pressure pointing towards a negative outlook as we head into the weekend.”