Fed Chair Yellen's Testimony Triggers Two-Sided Response

02/25/2015 9:00 am EST

Focus: FOREX

In this article, James Hyerczyk, at FXEmpire.com, explores how Janet Yellen’s initial comments on Tuesday underpinned the dollar and put pressure on the euro, British pound, Gold, and Crude Oil, but he also highlights how and why the greenback started to weaken.

Commodity and foreign currency markets had volatile and mixed reactions to the start of Fed Chair Janet Yellen’s two-day testimony before Congress. The moves were triggered by active movement by the US dollar.

The testimony began with the US dollar ticking upward as Yellen hinted that the improving economy would lead to higher interest rates in 2015. Traders responded the most, however, when she added that there are still risks to the US economy that could curtail the Fed’s plans.

Yellen’s first day of testimony was not too dovish or too hawkish. She provided middle of the ground—or balanced—answers, as almost to avoid spooking the markets. At one point, she touted the improving labor market by highlighting the drop in the unemployment rate. She then added that there were still concerns to deal with, such as workplace participation and wage growth.

Fed Chair Yellen’s initial comments underpinned the dollar, pressuring the euro, British pound, Gold and Crude Oil, but the greenback began to weaken when she started to mention the risks. She reiterated the Fed’s call for investors to remain “patient” about the Fed’s plans to raise interest rates, which many believe means June, but then added that a rate hike carries risk such as a stronger dollar.

Traders didn’t react too well to the statements about risk and the dollar weakened, underpinning the forex and commodity markets.

The EUR/USD surged after Yellen highlighted the risks associated with a rate hike, but not enough to change the trend or the longer-term outlook for the single currency. Other news affecting the value of the euro was the release of the EuroZone’s final CPI reading of -0.6%.

The GBP/USD also found support from Yellen’s comments, but this was more likely related to short-covering and position-squaring. Also supporting the British pound were comments from Bank of England member Kristin Forbes.

Ms. Forbes said in a speech that financial instability is one potential risk from a prolonged period of historically low interest rates. She said, “If economic growth continues at or above trend, the financial system continues to heal, and the cost of borrowing in the UK remains near zero, these risks to the financial system could build.”

April Comex Gold had a volatile trading session, driven mostly by the wild swings by the US dollar. Since gold is dollar-denominated, the market could face continued volatility throughout the session as investors digest the meaning of Yellen’s comments.

April Crude Oil had little reaction to Yellen’s testimony. While the whipsaw price action by the dollar may have had a little effect on the movement in crude oil, the primary focus for traders is still on production. This tone is expected to continue the rest of the session, as investors make adjustments ahead of Wednesday’s weekly inventory report. Traders expect the US weekly Energy Information Administration’s report to show that supply rose by 3.6 million barrels last week.

By James Hyerczyk, Analyst, FXEmpire.com

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