Talking Points:
- Today marks the beginning of Chair Yellen’s twice-annual Humphrey-Hawkins testimony to be delivered to Congress. This will kick off with the Federal Reserve’s monetary policy report and prepared remarks, followed by questions from Congress, and this is where matters can get interesting.
- The U.S. Dollar is continuing in the bullish trend channel that’s defined February price action.
- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).
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In yesterday’s piece, we looked at recent price action in the U.S. Dollar, in which a near-historic run to end Q4 was met with some fairly aggressive selling throughout January that wiped out almost 60% of that previous bullish run. But so far in February the U.S. Dollar has been climbing back in a rather consistent trend channel which, at this point, makes for a bear flag formation. And over the next two days, Fed Chair Janet Yellen is testifying in front of Congress, starting with the Senate today and finishing with the House of Representatives tomorrow as part of her twice-annual Humphrey Hawkins testimony (discussed in a bit more detail below).
Chart prepared by James Stanley
What is Humphrey-Hawkins?
Humphrey-Hawkins refers to the Full Employment and Balanced Growth Act passed in 1978, which was passed in order to expand Congress’s role in the process of setting economic policy. This mandates that the Fed create a monetary policy report to be delivered twice a year to each arm of Congress, with the Senate Banking Committee representing the Senate and the House Financial Services Committee serving for the House of Representatives.
These events start with the delivery of the monetary policy report and prepared remarks, at which point the floor is opened for questions, and this is when matters can get really interesting.
What Might Markets Be Looking For?
March: Will the Fed be open to hiking in March? And if they aren’t looking to hike in March, how open would they be to telegraphing a hike in March for a later meeting, perhaps in May (no press conference planned, but all meetings are ‘live’ meetings) or June? There continues to be a bit of disconnect between the Fed’s expectations and what markets seem to be looking for. The Fed has previously said that they were expecting three rate hikes this year, and this statement was delivered in December when the Fed hiked rates for only the second time in the past 10 years. But markets never really seemed to buy that idea, as the Fed has displayed a track record of passivity that had markets already discounting the Fed’s forecasts just weeks after it was issued, with the general market expectation that, maybe two rate hikes would be seen.
If this sounds familiar, it is. This is very similar to the situation that led-in to last year’s Februrary Humphrey Hawkins testimony with a far different backdrop. When the Fed hiked rates for the first time in nine years in December of 2015, they said that they expected a full four rate hikes in 2016. And within weeks of that forecast, equity markets began to collapse, spending much of the first six weeks of 2016 in some form of sell-off: And this was at least partially driven by fear that the Fed would persistently try to ‘normalize’ policy in the face of a major slowdown in China. This led directly into Chair Yellen’s February Humphrey-Hawkins testimony, and as you can imagine, Congress had quite a few questions.
Chart prepared by James Stanley
Chair Yellen successfully navigated a gauntlet of questions during that two-day testimony in February of last year to assuage market fears of the Fed contributing any additional pressure to the situation. On day one of that testimony, she was asked about the bank’s opinion on negative rates, to which she responded that the Fed had previously investigate the idea and wasn’t even sure if that concept was legal. But on day two of that testimony, when posed with the same question Chair Yellen said that the Federal Reserve wouldn’t take any policy options off-the-table; and this provided a degree of comfort to markets that allowed support to develop in equity markets as the U.S. Dollar weakened for the next three months.
What is a Reasonable Expectation for This Two-Day Testimony?
Chair Yellen likely does not want to rock the boat here, so don’t expect her to come right out and say ‘were going to hike in March’. More likely, she’ll speak to ‘pressures’ in the economy regarding inflation and employment, and the degree of hawkishness inferred will probably emanate from how positive the Fed Chair is on current growth metrics in the United States. Statements such as ‘nearing full employment’ or ‘risks are roughly balanced’ will likely be taken as optimistic and supportive of the idea of three hikes in 2017.
On the prospect of three hikes in 2017: There are four meetings with press conferences in the remaining part of the year, in March, June, September and December. And given how careful the Fed has been with normalizing policy since the emergency-like measures enacted during the Financial Collapse, it can be difficult to imagine the bank attempting to pose more than one hike in a three-month period, so this is why the focus will likely be on March for today. As Chair Yellen has said multiple times, every meeting is a ‘live’ meeting, meaning that meetings that do not have planned press conferences and economic projections could still see a hike, so this means that meetings in May, July and November could potential see a rate move as well.
A Patient Way to Approach Today (and Tomorrow)
These types of events can potentially trigger new trends, and that’s where the excitement usually lies as this could create something that could last for months. But trading directly around such events, looking to catch entries during a really volatile period in the market can be difficult.
Rather than chasing prices during a volatile, prolonged news announcement that will essentially span the next two days, traders can look for price action to put in a longer-term indication of strength or weakness. On the U.S. Dollar, (DXY), the level of 101.53 is the 50% retracement of the bearish move in January, and if price action breaks above this level, the prior bearish move will be negated. Or for those that do want to move a bit more aggressively, the near-term zone of resistance around 101 could be utilized for support in the effort of catching a faster entry after a top-side move (shown as ‘R1’ on the below chart).
Chart prepared by James Stanley
--- Written by James Stanley, Strategist for DailyFX.com
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