EUR/USD – 3 Scenarios Surrounding Janet Yellen’s Testimony

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EUR/USD - 3 Scenarios Surrounding Janet Yellen's Testimony

The Backdrop: 
The EUR/USD looks like it is setting up for a sell-off as traders await Janet Yellen’s 2-day testimony in front of different congressional bodies. The euro started the 7/15 European session softer because of disappointing ZEW Economic Sentiment reading. The 7/15 US session started with soft US retail sales data for June, but this did not support the weight of the EUR/USD, which continues to look bearish going into the highly anticipated event risk. Traders will be monitoring the 2-day QA session for clues on when the Fed will raise interest rates.

Looking at the 4H chart, note that the market has a bearish bias based on 1) price action breaking below a rising trendline last week and respecting it as resistance since. 2) Price holding below July’s falling trendline. 3) The RSI is holding below 60 for the most part, reflecting a maintenance of the bearish momentum.

EUR/USD 4H Chart 7/15
eurusd 4h chart 7/15
(click to enlarge)

Let’s explore 3 scenarios surrounding Janet Yellen’s testimony.

1) Scenario 1 – Status Quo: The current projection is for a mid-2015 rate hike. This was the projection throughout the year, and there is a concern that the poor Q1 GDP, at an annualized rate of -2.9%, and some underwhelming Q2 data, would push back the rate hike. The recent FOMC meeting minutes did not mention changing the time-line for the rate hike and instead focused on ending QE. There, the status quo expectation is that Janet Yellen won’t change the time-line, even if she does note the poor Q1 growth rate. FOMC’s iInflation expectations of 1.5% to 2.0% in 2015 suggests there will be room the first rate hike in years.

In this scenario, the EUR/USD should remain bearish in the short-term, with pressure toward the 1.3505-1.3520 June lows. Without putting away the possibility of a later rate hike, the EUR/USD might have trouble breaking the 1.35 handle, and will have a tougher time breaking below the 2014-low of 1.3475.

2) Scenario 2 – Hawkish Tone Suggests Rate like to be early to mid 2015: If Janet Yellen suggests that the FOMC does not see a reason to delay a rate hike beyond mid-2015, the market can see this as hawkish. Yellen is a known dove to begin with, and the poor Q1 data has kept the possibility of a delayed rate hike in play. If Yellen downplays the poor data, and gives assurance that the rate hike is still planned for mid-2015, it would already be slightly hawkish. Saying the rate hike should be before mid-2015 will be very hawkish. In this scenario, Yellen will likely focus on the recent positive jobs data instead of the earlier growth data.

Even in the slightly hawkish scenario, the EUR/USD should continue lower to test the 1.3505-1.3520 handle, with a good chance to break that and challenge the 2014-lows around 1.3475. The very hawkish scenario suggests this price action in a hurry and be more a reason for traders to push EUR/USD to fresh lows on the year.

3) Scenario 3 – Janet Yellen is concerned with slow growth and delays rate hike: If Janet Yellen comes out directly saying the rate hike needs to be delayed, there will be a fire-sale on the USD. However, she is likely to be more subtle. If she is to be dovish, she would hint that if growth rate misses FOMC projections, the bank will have to consider delaying the rate hike.

In this USD-negative scenario, the EUR/USD might still drift lower toward the 1.3505-1.3520 area. However, it is more likely that traders will support the pair above this area.

If price instead of drifting lower,  pushes above 1.3640, we could be looking at some short-term bullish attempt to challenge the July high at 1.37. If Janet Yellen is going to be direct instead of subtle, then the EUR/USD might rally sharply and will likely break above 1.37. Otherwise, a regular subtle notion of a rate hike delay should not be enough to power EUR/USD into a bullish trend, but it can stop the current bearish trend and guide EUR/USD into consolidation.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.