Market News & Insights
11 February 2014

USD Wains ahead of Yellen Testimony

EUR/USD 1.3674
GBP/USD 1.6414
GBP/EUR 1.2005 (0.8331)
EUR/CHF 1.2245
GBP/CHF 1.4711
GBP/AUD 1.8169

There has been little in the way of major news flow or data over the first 48 trading hours of the week and the risk positive tone towards the end of last week has prevailed. The buoyant risk comes from hopes the Fed will taper at a slower pace than expected based on the last two months jobs reports, thus the excess liquidity and capital will remain for that little bit longer. We are also seeing a natural bounce following heavy selling for almost two weeks and considerable EM pressures.

The USD has been facing light selling pressure since Friday, again based on Friday’s weak jobs report and also in hopes that Janet Yellen’s first testimony to Congress will reveal a dovish streak. Yellen takes her first meeting as chair of the Fed and any mention of slowing the current pace of tapering is likely to see renewed heavy selling of the greenback. The dollar has failed to generate any serious interest since the Fed surprised us with a December taper, perhaps the gradual pace of the QE wind down or lack of faith in the recovery has caused this but any sign of weakness from the FED is likely to be very negative for USD.

The general consensus is that Yellen is unlikely to veer from the Fed’s current rhetoric as markets have now got used to an apparent $10bln taper per month, but she is almost certainly going to have to answer questions on forward guidance. There has been a lot of speculation in markets about Fed policy going forward and Yellen may use this opportunity to clarify some points and update forward guidance. Last June Bernanke introduced some time frames on unemployment targets for ending QE (7% by mid 2014) and to begin rate hike discussions (6.5% by mid 2015). The current unemployment rate is currently 6.6% so some clarification is certainly required.

GBP is facing obvious tensions, despite the recent USD sell off GBPUSD has remained in a tight range and EURGBP has been drifting towards 2014 highs. Technically this leaves the pound susceptible to a break out and in the face of tomorrow’s major fundamental data the timing could not be better. The BOE quarterly inflation report is due for release tomorrow and is probably the biggest bit of event risk the pound has faced in recent months. There is a dislocation as to what the BOE have guided and when the market believes rates will start to rise, we are hoping for clarification on this tomorrow and until we get this, tension is likely to remain in GBP pairs.

Despite obvious fragilities in the Eurozone the single currency is looking for its fifth consecutive daily rally against USD, one of the longest EURUSD bull runs in two months. There is obviously USD weakness at play here as well so it’s not all EUR glory but the single currency has shown gains against GBP and JPY since last week’s ECB meeting. Another concern to add to the regional risk was comments from the head of the Single Supervisory mechanism (SSM) for banks was that bank failures were a necessary part of ongoing stress tests should they want to maintain credibility.