FX Market Scrambles To Make Sense Of Yellen's Testimony

 | Feb 11, 2016 02:01AM ET

Currencies are a transmission mechanism. Since the financial crisis, central banks have become increasingly adept at manipulating them as agents of monetary policy. Traders who ignore currencies may have critical blindspots as stock markets twist and turn through currency transmissions. From time-to-time, I will post “Forex Critical” to highlight currency charts that I believe are of particular interest because of an urgent and meaningful technical setup. These currency pairs will typically sit at important technical junctures, trends, and/or critical breakdowns and breakouts.

I kick-off this series in the wake of Congressional testimony from the U.S. Federal Reserve’s Chair Janet Yellen. Currency markets behaved in a way that suggests traders did not quite know what to make of Yellen’s admission that rate hikes may need to slow while also standing firm with data-driven decision-making.

The currencies of interest: the U.S. dollar (DXY0), the Japanese yen (N:FXY), the British pound (N:FXB), and the Canadian dollar (N:FXC).

The U.S. dollar index rallied right to resistance at its 200-day moving average (DMA) only to fall back to a fresh 4-month closing low. This trading action confirms the recent breakdown and makes the dollar increasingly unattractive. “Policy divergence” is waning more and more as an important trading theme. To-date, some pundits (like Jim Cramer of CNBC and TheStreet.com) have pleaded for a weaker U.S. dollar to help boost the fortunes of American companies and the stock market. The recent weakness has not helped the stock market one bit so far..

The U.S. dollar index fails to recover from the recent 200DMA breakdown.

This chart of the U.S. dollar index is important context for the remaining charts…

The British pound is starting to turn the corner against the U.S. dollar (GBP/USD). I recently wrote about the Bank of England’s path to rate hike interruptus in “The Bank of England’s Recent Retreat On Rate Hikes (A Blueprint for the Fed?).” Governor Mark Carney’s official acknowledgement of what the market had long suspected served as a bottom. While GBP/USD is currently struggling to break through 50DMA resistance, the 20DMA has turned the corner AND the upper-Bollinger Bands (BBs) channel is decidedly pointed upward. Momentum is slowly but surely turning. A newly resurgent British pound will likely face more and more dovish talk from the Bank of England.