The Fed’s Yellen ignites further downside for the US dollar. What’s next?

On Tuesday at GMT 03:00 PM, the new fed chairman Janet Yellen testified before the US Congress. She is well-known for her dovish outlook, and was expected to deliver a dovish statement. The market already priced in most of the outcome. The US dollar is trading lower for the last couple of days, as the pairs like EURUSD, AUDUSD and GBPUSD are bought time and again on the major dips. After her statement and testimony, the US dollar was seen under pressure. However, the market sentiment remains mixed.

One of the notable remarks from her statement is that she believes that the recovery in the job market is still far from over. She hinted that there are no plans to change the ongoing plans of scaling the stimulus. However, she also mentioned that only a notable change in the outlook would encourage the policy makers think again on the reduction of asset purchases. Her opening statement started with the praise for the Ben Bernanke. She said “His leadership helped make our economy and financial system stronger and ensured that the Federal Reserve is transparent and accountable. I pledge to continue that work.”

She also shared her views on the inflation, the second most important factor. She said “Inflation remained low as the economy picked up strength, with both the headline and core personal consumption expenditures, or PCE, price indexes rising only about 1 percent last year, well below the FOMC’s 2 percent objective for inflation over the longer run.”

She was a bit more optimistic in the longer run, as she said that “economic activity and employment will expand at a moderate pace this year and next, the unemployment rate will continue to decline toward its longer-run sustainable level, and inflation will move back toward 2 percent over coming years.”

So, the core or you can say summary of her testimony is that the Fed is likely to continue the reduction plan for the QE, unless there is no major change in the economic outlook. However, the emphasis on keeping the interest rates lower in the long run is weighing on the US dollar.

One of the biggest gainers yesterday was the AUDUSD pair. The AUDUSD crushed the sellers, and traded higher towards the 0.9050 level. Another pair, which followed the AUDUSD was the NZDUSD. The NZDUSD also climbed above the 0.8320 level, and challenged the all-important 0.8340/50 region.

Now, there are a couple of things to watch in the coming sessions. One of the most important risk events is scheduled later during the day. At GMT 10:30 AM, the BOE is scheduled to release the inflation report, and not to forget that the BOE Governor Mark Carney is also scheduled to deliver a speech around the same time. The GBPUSD traded as high as 1.6485 after the Yellen’s testimony. Now, we need to see whether the pair can manage to trade higher or not. It would be interesting to see how the BOE Governor tackles the situation of the justifying the call for no change in the plan to hike rates, as the UK unemployment rate keeps dropping faster than expected.

Around five hours later, the ECB President Mario Draghi’s speech is scheduled. We can expect some moves in the EURUSD around the same time. We also have the Australia’s unemployment report scheduled to be published in the Thursday’s Asian session. So, we can expect a lot of fireworks in the coming sessions for most of the major pairs.

Technically, the EURUSD struggled to take out the 1.3680 level after the Fed’s Yellen testimony. This is an important level, as it also represents the 50.0% retracement level of the last major down move from 1.3891 to around 1.3480 level. The pair is now trading lower. There is a trend line, which also acted as a resistance for the pair, as can be seen in the 4 hour chart shown below. The pair as of writing is coming closer to the 200 moving average on the 4 hour chart, which can act as a support for the pair. A break lower may push the pair towards the 1.3570/60 level. The 55 moving average also lies around the mentioned level.

So, take note of these levels friends while trading.

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Happy Trading Friends!

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