HomeContributorsFundamental AnalysisDollar Consolidates ahead of Yellen's Congressional Testimony

Dollar Consolidates ahead of Yellen’s Congressional Testimony

In the US, the main event will be Fed Chair Yellen’s semi-annual Humphrey-Hawkins testimony on monetary policy before the Senate Committee on Banking, Housing, and Urban Affairs. She will present the same testimony before the House Committee on Financial Services tomorrow. Although the testimony will be the same on both occasions, we expect market participants to pay extra attention to the Q&A sessions. In particular they may be on the lookout for any fresh hints regarding her view on the economy, and whether she is likely to vote in favor of a rate hike in the upcoming policy meetings. The Fed Chair was relatively upbeat in her latest speech, indicating that the US is near maximum employment and that inflation is moving toward the Fed’s goal. She also said that the timing of the next rate hike will depend on the economy over the coming months. Given that since then, US data have been generally strong if one overlooks the disappointing wage growth print in January, we do not see a material reason for Yellen to deviate from her previously optimistic stance. Overall confident remarks from the Fed chief with regards to the economy and the Fed’s progress towards its dual mandate could cause the probability for a March hike to surge, and may thereby bring USD under renewed buying interest. Currently, that probability is almost 18% according to the Fed funds futures.

EUR/USD traded lower on Monday after it tested as a resistance the prior upside support line taken from the low of the 16th of January. However, the slide was stopped by the 1.0590 (S1) support level, marked by the low of the 19th of January. The pair has been trading within a short-term downside channel since the 2nd of February and as such we maintain the view that the near-term bias is negative. A clear dip below 1.0590 (S1) would confirm a forthcoming lower low on the 4-hour chart and is possible to open the way for our next support of 1.0540 (S2).

Overnight: China’s inflation data amplify the global reflation theme

China’s CPI and PPI data for January showed that inflationary pressures continue to accelerate in the world’s second largest economy, adding to the global reflation theme that has driven market action in recent weeks. Both the CPI and the PPI rates rose by more than forecast. The main beneficiary from these news was the Australian dollar, which rose somewhat against its counterparts on the news and continued even higher in the following hours. With regards to the PBoC, the Bank has been tightening its policy in recent weeks in order to halt some of the depreciation pressure on the yuan. As such, we think that accelerating inflation gives the Bank more room to tighten its policy even further in the foreseeable future, if needed.

What’s more, the persistent surge in the PPI rate is likely to be welcomed by foreign central banks struggling to hit their inflation targets, such as the ECB and BoJ. Considering that falling Chinese producer prices between 2012 and 2016 may have held down imported inflation in the Eurozone and Japan, the turnaround in that dynamic may actually boost imported inflation in those nations and thereby, support their overall inflation prints.

Therefore, we believe that the consistent increase in China’s PPI rate could diminish somewhat the likelihood for any further aggressive easing measures by the likes of the ECB and the BoJ, and may thereby ease some of the recent depreciation on the euro and the yen. Having said that though, the near-term outlook for both currencies is still cautiously negative in our view, bearing in mind Eurozone’s political risks and the BoJ’s yield-control framework amid an environment of rising global yields.

Today’s highlights:

During the European day, we get CPI data for January from the UK. The consensus is for both the headline and the core CPI rates to have risen further. Even though further surge in these rates may support the pound at the release, we do not expect such an increase to materially affect the BoE’s neutral policy stance, at least in the short-term. After all, at the press conference following the latest BoE meeting, Governor Carney made it clear that on the whole, the MPC remains willing to "look through" above-target inflation, and that investors should not expect rate hikes anytime soon.

EUR/GBP slid yesterday, falling below the support now turned into resistance of 0.8490 (R1) and the neckline of a head and shoulders pattern which started to form since the 22nd of December. This keeps the short-term bias negative and as such, we would expect a dip below 0.8450 (S1) to set the stage for extensions towards our next support of 0.8380 (S2). Accelerating UK inflation today could prove the catalyst for such a slide. As for the bigger picture, the rate continues to trade above the long-term uptrend line taken from the lows of November 2015. As such, we would like to see a decisive close below that line before we get confident on larger bearish extensions.

In Germany, the ZEW survey for February is due out. The forecast is for the expectations index to decline, but for the current conditions figure to tick up. On balance, we think that deteriorating expectations are likely to overshadow improving current conditions. Even though this survey is usually not a major market mover for the common currency, this could cause the German DAX to correct a bit lower. We also get the nation’s GDP data for Q4 and the final CPI figures for January. From Eurozone, we get the 2nd estimate of Q4 GDP and industrial production data for December.

As for the US economic data, we get the NFIB small business optimism index and the PPI, both for January. Nonetheless, considering that investors will likely have their gaze locked on Yellen, these indicators may pass unnoticed.

Besides Chair Yellen, we have two more FOMC members scheduled to speak today: Dallas Fed President Robert Kaplan and Atlanta Fed President Dennis Lockhart.

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