EUR/USD: Yellen In The Limelight

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EUR/USD: Yellen In The Limelight

• Bank of France governor Francois Villeroy de Galhau said central banks' recent struggle with deflationary forces was not finished and that getting inflation back to normal levels was a question of credibility. Villeroy de Galhau said the ECB was determined to uphold its mandate to bring back inflation to below but close to 2%, because weak inflation made the necessary deleveraging process of European countries more painful. Asked if there was any limit to negative interest rates, Villeroy said neither the Eurozone nor Switzerland had experienced negative interest rates on household and SMEs deposits so far.

• We think the USD will remain nervous today in anticipation of Fed chair Yellen's speech. If she repeats that the interest rate normalization process will continue, as we expect, although at a cautious pace and still remaining data dependent, this may induce some initial profit taking in the USD's favor, but the USD may return under pressure if stock markets react badly to the news. On the other hand, if Yellen sounds vague on further tightening, this will probably further convince investors that current market expectations that there is no great margin for more Fed rate hikes this year are correct and this will likely weigh on the already beleaguered dollar.

• We took profit on EUR/USD long at 1.1250. The EUR/USD hit a new 2016 peak at 1.1338 on Tuesday. An eventual break above 1.1338 will unlock October 2015 1.1495 peak. We placed a bid at 1.1150. Our next target will be 1.1450.

GBP/USD: Buy At 1.4460 For 1.4745

• British industrial output fell 1.1% mom in December after a 0.8% drop in November. It was the sharpest monthly drop in December since 2012 and was driven down by declines in mining, oil and gas extraction and manufacturing. The Office for National Statistics also revised down its estimate for industrial output in the fourth quarter to show a 0.5% drop from a 0.2% decline previously. It said this would have a negligible impact on its previous estimate of economic growth.

• The GBP/USD stays strong today despite weaker-than-expected data. This highlights upside GBP/USD bias. We are looking to get long at 1.4460. The scope for recovery is 1.4745, 38.2% retrace of the 1.5820-1.4080 bearish cycle. 14-day momentum remains marginally positive, which is also a bullish signal.

NZD/USD: Stay Long For 0.6800

• With Chinese financial markets shut this week for the Lunar New Year, the NZD/USD traders are focused mainly on Federal Reserve Chair Janet Yellen's testimony later in the session.

• While Yellen is expected to defend the Fed's first rate hike in a decade and insist that further rises remain on track, any sign of a departure from such a stance would give risk assets a welcome breather.

• After setting a new short-term low the NZD/USD is up. We see some encouraging technical signs – a doji on the daily candle forms and may indicate the recent slide is done. The NZD/USD is still above the 7-day exponential moving average and a close above the daily cloud base (0.6656) will be encouraging. We stay long for 0.6800.

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