Top 3 Event Risk Affecting Forex this Week

There has been very little activity in the foreign exchange market this morning but that does not mean it will be a quiet consolidative week for currencies. In fact, we believe that some of this week's event risks can trigger breakouts in the majors. Forex traders are waiting for new direction and Janet Yellen's semi-annual testimony as well as the Bank of England's Quarterly Inflation report would be the perfect catalysts. In addition to these 2 event risks, China will also release its latest trade numbers, which can affect risk appetite across the forex market.

1. Janet Yellen Testimony

One of the first decisions that Janet Yellen needs to make as Federal Reserve Chairman is what to do with their unemployment rate threshold. Will they lower it or drop it completely? On Friday we saw the U.S. jobless rate dropped to 6.6%, only 0.1% above the central bank's threshold but non-farm payroll growth was muted for the second month in a row. Tuesday's testimony will be our first opportunity to get Yellen's interpretation of the data. She is scheduled to testify before the House on Tuesday and Senate on Thursday. Her prepared remarks will be released at 8:30am ET on Tuesday, 90 minutes before she delivers her first public speech on the economy as Chairman of the Federal Reserve. There is no doubt that she will be asked about what the Fed plans to do with their 6.5% unemployment rate threshold and most likely she will say that they will reevaluate forward guidance in March. Yet it may be difficult for her to dance around all of the questions from Congress without revealing some of her plans for monetary policy.

2. Bank of England Inflation Report

Like the Federal Reserve, Bank of England policymakers also have their backs against the wall because the unemployment rate is falling faster than they anticipated. The BoE tied itself to an unemployment rate threshold and they are now only 0.1% away from that level. Aside from providing their latest economic forecasts, the Monetary Policy Committee will often telegraph major changes in policy in their Quarterly Inflation Report. At bare minimum, the BoE will need to update their forward guidance and could choose to abandon their unemployment rate threshold or lower it. Abandoning the threshold would create less volatility for their financial markets and currency than a change in the level of the threshold but both scenarios would most likely be negative for sterling.

3. Chinese Trade Balance

The Chinese economy is slowing and this week's trade balance will tell us just how much export growth slowed in at the beginning of the year. Exports are expected to have grown by only 1% in January, down from 4.3% at the end of last year. If exports decline and the trade surplus contracts concerns about slower Chinese growth could drag equities and currencies lower. The Australian and New Zealand dollars should suffer the most as investors wonder whether it was wise for the Reserve Bank of Australia to drop its easing bias. At the start of the year we saw how concerns about U.S. and Chinese growth weighed on the markets and this is a reason why risk is vulnerable this week.

Aside from Janet Yellen's testimony, the Bank of England Inflation report and Chinese trade numbers, Australian employment, U.S. retail sales and the Eurozone's fourth quarter GDP numbers can also have a big impact on how currencies trade this week.