EUR/USD: Could Yellen Take Us Above 1.1400?
Can Yellen dig herself and the dollar out of a hole? Yellen testifying to Congress, my joint favourite time of the year, twinned with when she does it 6 months later Just so everyone knows how it's going to go down. We kick off at 13.30 GMT with the release of the text of her testimony. That's where the first market reaction will come.
We're going to be slapped with tons of headlines so we'll pick out the most pertinent ones then add the rest.
At 15.00 GMT she sits down in front of the firing squad and reads the testimony (cue grab a coffee, or do any of those household chores you've been putting off). Then she says "so" a few hundred times as she answers questions. Tomorrow it's rinse and repeat.
The important part is what she's going to say in the testimony. It's probably safe to assume that the market right now, and once again, has completely overreacted in its fears for the US economy and everything else. When I say overreacted, I mostly mean that in terms of how the Fed think. In essence it sees more doom and gloom than the Fed
What things could Yellen say?
The market will be looking to see whether the Fed is worried about the economy so soon after hiking. That's the basis of a lot of the reaction we've seen. Here's a few things that Yellen is likely to say;
- The economy is still doing fine (consumption, inflation, jobs market)
- The Fed keep their view that the path of hikes will be gradual and monetary policy is appropriate right now, and it's all data dependant
- The US economy faces headwinds from external factors
- The Fed doesn't expect the market volatility to affect the US but is watching
- The Fed is ready to act to counter any negative risks to the economy
As a trader, it’s difficult to predict the impact of a major trading hub being closed. More often than not, it leads to slow, lackluster trading conditions as traders focus on enjoying their time off; however, because there is less volume in the market, we occasionally witness explosive moves, especially when all traders try to exit their crowded trades at the same time. Less than halfway through the Chinese Lunar New Year celebrations (and associated Asian bank holidays), it’s pretty clear that we’re getting the latter scenario.
Markets were extremely volatile overnight, highlighted by a 5.4% drop in Japan's Nikkei index, the Japanese 10-year bond yield turning negative for the first time in history and the corresponding rout in USD/JPY, which nearly reached the 1.1400 level that we mentioned yesterday. The risk-off moves have carried over into European trade, where most major bourses are trading down by about 2% (though the UK’s FTSE index is only down 1% as of writing).
In the FX market, one of the big surprises for some traders is that the US dollar continues to fall amidst the global market turmoil. Long seen as a so-called “safe haven” currency, the greenback shifted roles to more of a “risk” currency late last year as the Federal Reserve laid out an aggressive path of interest-rate hikes. Now, traders are expressing skepticism that the Fed will be able to raise interest rates even once this year, much less the four times that the Fed laid out in its most recent Summary of Economic Projections. To that end, Fed Chair Janet Yellen’s semi-annual Humphrey-Hawkins testimony to Congress, starting tomorrow, will be this week’s marquee event risk.
If Dr. Yellen proverbially shrugs off the ongoing global market volatility and the associated economic concerns, the dollar could regain its mojo (though we doubt this would do much to stabilize sentiment toward other markets). Considering the audience though – politicians representing a worried populace – we think it’s far more likely that Yellen will strike a dovish tone, expressing concern with the recent market moves and downplaying the chances of a March rate hike, which traders view as a longshot in any case.
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