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Markets await Janet Yellen’s testimony

Global markets are in a period of consolidation at the moment, with a sense of caution prevailing, heading into Janet Yellen’s inaugural monetary policy testimony.

Yellen will testify before the House later today and the Senate on Thursday. We also have Fed member, Charles Plosser, on the wires later today. As it stands, it seems the market is positioned for a fairly-dovish speech by Janet Yellen.

The mere appreciation we’ve seen in gold, with four consecutive sessions of gains, suggests there is a camp expecting Yellen to sound more cautious on the pace of tapering.

This move was triggered by Friday’s disappointing payrolls reading. While we are unlikely to hear any policy changes from Yellen, it is likely she will deliver a balanced speech, which will essentially reinforce what we’ve already heard from recent Fed meetings and commentary.

While acknowledging the improvement in the job market, Yellen would likely highlight that the jobs market is still operating below capacity, while inflation is tracking well below trend. She is also likely to reinforce that an accommodative stance remains imperative and potentially that asset purchases are not on a preset course.

Forward guidance might also be up for consideration after the unemployment rate dropped to 6.6%, on Friday. Admittedly though, it seems the Fed feels the asset purchase program (APP) has run its course and they are likely to remain comfortable tapering at the current pace.

Consolidation expected in emerging markets

Emerging markets (EM) are facing some consolidation in Asia today, with Japan closed in observance of National Foundation day. Yesterday was a fairly good day for the Asian region, most of the bourses enjoyed a positive reaction to the moves from Friday’s US trade.

China started off its first-full week of trade on a positive note with some encouraging comments from the PBoC’s 4Q monetary policy report helping sentiment. We could see some positioning ahead of China’s trade balance figures for January which are due out tomorrow. The surplus is expected to be slightly lower, presumably due to winding down as we head into the Lunar New year break.

While data is light for the region today, we still have India’s exports, imports and local car sales as well as Philippine exports to look out for. In Indonesia, investors will continue to track the impact of reports suggesting the government is unlikely to relax its ban on unprocessed ore exports. This has resulted in nickel jumping to a two-week high.

Gold approaching an interesting level

After the carnage in the EM space following the Fed’s decision to start tapering, Janet Yellen’s comments will certainly carry some weight for the EM space. Emerging currencies are trading a touch heavy as caution prevails ahead of Janet Yellen’s testimony.

The US dollar, bonds and gold will be the key assets to watch in US trade. We will keep a close eye on gold, after some hefty gains over the past week, as it is now approaching January highs, at 1,280. Gold is right on the 38.2% retracement of the drop, from 1434 in August last year, down to January lows at 1183.

Janet Yellen has quite a task on her hands to keep this testimony as balanced as possible, but chances are traders will read into any change in language which could result in some big moves.

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