Investing.com -- EUR/USD rose moderately on Wednesday extending gains from the previous session as currency traders continued to digest extremely dovish comments from Janet Yellen, which provided strong indications that the Federal Reserve could push back the timing of its next interest rate hike beyond the first half of the year.
The currency pair traded between 1.1286 and 1.1364 before settling at 1.1337, up 0.0047 or 0.43% on the session. With one trading day left in March, the dollar is on pace for its worst monthly performance in more than five years. As a result, the euro has surged more than 4% against its American counterpart during that span and is up sharply from its level of 1.0860 at the start of the year.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
Investors continued to react to Yellen's remarks on Tuesday at a closely-watched speech before The Economic Club of New York, when the Fed chair emphasized that any rate hikes from the Fed will likely take place in a gradual manner unless considerable global and financial risks recede in the near-term future. Yellen's comments contradict the hawkish positions of four of her colleagues on the Federal Open Market Committee (FOMC), which suggested last week that the U.S. Central Bank should approve up to three rate hikes this year. Earlier this month, the FOMC held the target range on its benchmark Federal Funds Rate between 0.25 and 0.50%, marking the second straight meeting it left rates unchanged following December's historic rate hike.
While Yellen acknowledged that the U.S. economy has demonstrated remarkable resiliency as the labor market continues to flourish, she expressed significant concern regarding soft manufacturing and export levels, as well as declining capital expenditures. Notably, Yellen cited research from Federal Reserve of Chicago president Charles Evans on the policy direction that should be undertaken by the Fed in periods of increased uncertainty when short-term rates remain low. In a 2015 paper entitled "Risk Management for Monetary Policy Near the Zero Lower Bound," Evans and others argued that increased risks on nominal interest rates call for "greater gradualism," in comparison with environments when rates are "appreciably above zero."
On Wednesday, Evans reiterated that he expects the Fed to raise interest rates as much as two times this year, with an April rate hike likely off the table. Much like Yellen, Evans is cautious of lifting rates too quickly as inflation in the euro zone and elsewhere remains stubbornly low.
"I think moving in June would be on the basis of further improvements in the labor market," Evans told CNBC. "I just don't think we want to get ahead of ourselves."
The CME Group's (NASDAQ:CME) Fed Watch tool lowered the probability of a September rate hike to 35.6% on Wednesday, down from 57.0% last month. In addition, the CME Group said there is a 16.8% chance the Fed will raise rates twice more before the end of December, considerably below a 39.7% probability one month ago.
Elsewhere, European Central Bank Executive Board member Benoit Coeure emphasized that negative interest rates are not the main tool at the Governing Council's disposal as it looks for ways to boost sluggish inflation. Speaking exclusively with Politico, Coeure also noted that it is unlikely that the ECB will begin offering "helicopter money," or direct cash to consumers as a way of bolstering economic growth throughout the region. Earlier this month, the ECB lowered its deposit rate deeper into negative territory at a meeting in Frankfurt.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.35% to an intraday low of 94.57, its lowest level since mid-October, before settling at 94.79. The index is on pace for its worst month since 2010. Any rate hikes by the Fed this year are viewed as bullish for the dollar, as investors pile into the greenback in order to capitalize on higher yields.
Yields on the U.S. 2-Year fell to a one-month low below 0.8%, as the yield curve between long and short-term U.S. government bond yields steepened. Yields on the U.S. 10-Year rose two basis points to 1.82%.