From a market perspective, the dollar is rallying into her speech, so could we be in a situation where we buy the rumour but sell the fact? What Yellen says is out of our control completely, so the best way to plan for the outcome is to flesh out a couple of potential scenarios. We will focus on USD/JPY as this pair can be sensitive to changes in monetary policy.
1, Yellen is hawkish – talks about monetary policy tightening
This would be quite a departure for Yellen, who is considered dovish, and would be the most dollar positive outcome in our view. The dollar index could make fresh annual highs and USDJPY could re-test critical resistance at 104.13 – the high from 4th April, opening the way for a further advance back to 105.00.
2, Yellen is dovish – does not mention tightening or normalisation of monetary policy
Yellen tends to err on the side of caution when she makes speeches, and if she avoids the issue of tightening today this could trigger big disappointment in the markets and a potential sell off in the dollar. The result could be a recovery in the yen, sending USDJPY back down to the 101.50 lows from last month.
Another potential scenario to keep in mind is a vague Yellen. If she suggests that monetary policy needs to be normalised but does not elaborate on the Fed’s plans to do this then we could see some whipsaw action. Once the dust has settled then we could see the dollar trade sideways for a while.
What to do:
You could either try to pre-empt what Yellen is going to say (bad idea) or wait for the dust to settle and then make your move. Waitiing for a technical event is another option, what is sometimes called a break-out strategy. This can work well when there is an event risk that could potential trigger a new trend. There are three steps to this:
1, Assess where the market is now.
2, Decide an upside breakout level that could trigger further gains if Yellen is hawkish.
3, Decide on a downside breakout level to trade a weaker USDJPY, if Yellen is dovish.
The technicals:
Upside breakout level: 103.50, above here opens the way to 104.13 – April 4 high, then 104.92 – the high from January 16, then 105.44, the 2nd Jan high.
Downside breakout level: 102.80 – just below the 61.8% Fib retracement of the April- May sell off at 102.87. Below here opens the way to 102.52 – August 19 low, then 102.14 – low from August 15 and 101.51 – August.
Overall, this methodical way of trading key event risk, and could be critical to your trading success. Good luck.
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