The USD is continuing to drive itself higher against currencies and commodities before the beginning of Janet Yellen’s two-day testimony ahead of the US Congress. There is no doubting that Janet Yellen will be heavily quizzed regarding when the FOMC will begin raising US interest rates and the USD bulls will be hoping for further statements of commitment for the second half of this year, otherwise we could have quite a reversal in the currency markets on the cards. The FOMC only provided clarification last week that it will be in no hurry to begin raising interest rates, but traders are still backing the USD with the complete divergence in economic sentiment and monetary policy between the United States and everywhere else confronting investors.
2015 was supposed to be the year that central banks focused on normalizing monetary policy and beginning to raise interest rates, but so far all we have seen is central banks ease monetary policy left, right and centre. The major factor behind central banks easing policy further has been in many ways a direct response to the falling oil prices, which also shows how completely unaware everyone was regarding how sharp oil prices could decline. Expectations for the likes of the Bank of England (BoE) to raise interest rates this year have been all but completely erased, meaning the pressure is on Janet Yellen over the next two days to not push back US interest rate expectations any later than the second half of the year.
The GBPUSD has managed to rebound from extending down to 1.5331 yesterday to consolidating around 1.5447 after BoE Governor Carney eased investor’s fears by reiterating once again that the UK inflation risks are temporary. Carney also expressed that a potential Greece exit will carry some risks to the UK economy but traders are unlikely to be spooked by this unless anxiety regarding a possible Greece exit escalates again. In regards to where the GBPUSD could trade this week, data from both the US and UK is high in volume so there could be a few more twists and turns on the GBPUSD journey.
The GBPUSD will be at risk to losses if Janet Yellen excites the markets with a hawkish comment, while the pair could also extend higher if the Federal Reserve Chairwoman inspires USD softness. UK GDP is also released this Thursday where any indications of further pushed back UK interest rate expectations could spell bad news for the GBPUSD bulls. Even if the GBPUSD does suffer from some bearish momentum over the next two days, there is potential for another recovery of losses when the second US GDP estimate is released on Friday afternoon. We are noticing softer US data as 2015 has commenced, and the general consensus is that the GDP will be revised lower from the 2.6% first estimate provided a few weeks ago.
The EURUSD appears at risk to dropping below 1.13 for the second successive day with the markets acting very cautious as the clock begins to really tick over the situation in Greece. Even when the bailout extension finally gets confirmed that doesn’t mean that the Euro’s woes are over; a few hours ago Eurozone inflation fell at the fastest rate since records began nearly two decades ago a few hours ago, which has just increased the likelihood of Europe slipping into deflation. The Eurozone inflation data has just reiterated the bleak EU economic outlook and why the ECB finally provided the QE card. The longer-term outlook for the EURUSD is still very bearish and repeatedly weak performances from Europe like the inflation data this morning will make even the riskier of traders hesitant from purchasing the currency. EURUSD upside gains have been capped to USD weakness for some time, but traders have also been looking at a potential opportunity to sell on rallies when this has occurred anyway.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
Follow Jameel on Twitter @Jameel_FXTM
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