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USD Outlook to Be Undermined by Dovish Twist to Fed Forward Guidance

USD Outlook to Be Undermined by Dovish Twist to Fed Forward Guidance

David Song, Gregory Marks,

- First Humphrey-Hawkins Testimony With Fed Chairwoman Janet Yellen

- Will Also Speak to Senate Banking Committee on Thursday, February 13, 2014

Trading the News: Fed Humphrey-Hawkins Testimony

The Humphrey-Hawkins Testimony with Fed Chair Janet Yellen may heavily influence USD price action in the days ahead as market participants weigh the outlook for monetary policy.

What’s Expected:

Time of release: 02/11/2014 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

Indeed, there’s a risk that the Fed will implement a more dovish twist to its forward-guidanceas the unemployment rate quickly approaches the 6.5% threshold, but we may see a growing number of central bank officials favor another $10B taper at the March 19 meeting amid the prospects for a stronger recovery in 2014.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (DEC)

$12.000B

$18.756B

Average Hourly Earnings (YoY) (JAN)

1.8%

1.9%

Consumer Price Index (YoY) (DEC)

1.5%

1.5%

The Fed may stay on course to normalize monetary policy as the pickup in growth dampens the threat for disinflation, and the bullish sentiment surrounding the greenback may gather pace throughout 2014 should the central bank show a greater willingness to halt Quantitative Easing (QE) later this year.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (JAN)

180K

113K

ADP Employment Change (JAN)

185K

175K

ISM Manufacturing (JAN)

56.0

51.3

However, the slowdown in job growth along with the recent lull in business outputs may dampen bets for a stronger recovery, and the dollar may face additional headwinds over the near-term should the Fed opt for a smaller series of reductions to the asset-purchase program.

How To Trade This Event Risk(Video)

DailyFX on Demand Will Have Full Coverage of the Humphrey-Hawkins Testimony

Bullish USD Trade: Fed Retains Current Policy, Forward-Guidance

  • Need to see red, five-minute candle following the testimony to consider a short trade on EURUSD
  • If market reaction favors a long dollar trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bearish USD Trade: Yellen Adopts More Dovish Tone for Monetary Policy

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same setup as the bullish dollar trade, just in the opposite direction

Potential Price Targets For The Release

EURUSD Daily

Forex_USD_Outlook_to_Be_Undermined_by_Dovish_Twist_to_Fed_Forward_Guidance_body_Picture_2.png, USD Outlook to Be Undermined by Dovish Twist to Fed Forward Guidance

Chart - Created Using FXCM Marketscope 2.0

  • Threatening Descending Channel- Bearish Bias at Risk on Break of 1.3650 (78.6% expansion)
  • Relative Strength Index Retains Bearish Momentum- Carving Lower High?
  • Interim Resistance: 1.3800 (100.0% expansion) to 1.3830 (61.8% retracement)
  • Interim Support: 1.3450 (38.2% retracement) to 1.3460 (50.0% expansion)

Impact that the Fed Testimony has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL 2013

07/17/2013 12:30 GMT

-

-

+25

-10

July 2013 Fed Humphrey-Hawkins Testimony

Forex_USD_Outlook_to_Be_Undermined_by_Dovish_Twist_to_Fed_Forward_Guidance_body_Picture_1.png, USD Outlook to Be Undermined by Dovish Twist to Fed Forward Guidance

At the last Humphrey-Hawkins Testimony we saw initial Euro strength, but by Bernanke’s Q&A we saw the greenback gain some strength. Chairman Bernanke reiterated in his testimony that the FOMC was set to taper asset purchases by the end of the year if incoming data remained strong. Now that markets have gone through two $10B reductions in asset purchases in December and January, traders will be looking to remarks from Dr. Janet Yellen for further insight on recent developments in global markets. The new chairwoman will have the chance to clarify her forward guidance as she begins her four year term, although changes in that forward guidance are not expected. A dovish twist could support the market on the a short-term basis, but underlying risks of Fed’s actions remain.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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