Yellen preview: What to expect of EUR/USD?

Janet Yellen will deliver a speech at 20:00 GMT in San Francisco at the Commonwealth Club, on the subject: “The Goals of Monetary Policy and How We Pursue Them”. It not clear is she will be speaking about current economic conditions and the monetary policy stance. Tomorrow she will speak again in San Francisco, at the Stanford Institute for Economic Policy Research about “The Economic Outlook and the Conduct of Monetary Policy”. 

Markets on Wednesday area having a relatively quiet day, with most crosses inside yesterday’s trading range. If there are no mentions to the economic outlook or to actual monetary policy, calm could prevail in markets. On the other side, if Yellen speaks about her perspectives on rates, inflation, and growth, volatility could rise. 

Greenback is gaining ground in the market so far on Wednesday. The DXY (Dollar Index) is recovering modestly after falling yesterday to 1-month lows. So far it is a normal correction. If Yellen presents an outlook mentioning higher inflation, robust growth, leading to a scenario that favors rate hikes from the Fed; the US dollar could accelerate the correction. 

US CPI: Inflation pressures building, not fast enough to alarm the Fed - Wells Fargo

On the other scenario, a dovish Yellen, that talks more about the current uncertainty or diminishes the potential effects of Trump policies on inflation could weaken the greenback. That could also be the case if she describes a pessimist global outlook. 

The next FOMC meeting will be January 31/February 1. No rate hike is expected but for the March meeting, according to the FedWatch Tool from CME Group, current prices, show a probability of a 20% rate hike. 

What to expect from EUR/USD?

The pair is moving toward the support area around 1.0655 (daily low), where the 20-SMA in four hours chart is seen. A break of the mentioned area could accelerate the downside, with a target at 1.0625. If the decline continues, the next strong support could be seen around 1.0570/80. 

If Yellen boosts the pair to the upside, a consolidation above 1.0690 (20-hour SMA) could add momentum to the euro. Above the next resistance to watch is 1.0720 (yesterday’s high). A break higher would need a sharp depreciation of the US dollar in the market (a very dovish Yellen) and would open the doors for an advance toward 1.0750.