The reaction of the US dollar to Janet Yellen's speech in the US Congress is quite calm. Her rhetoric was expected (the text of her speech was known in advance), with the exception of a few remarks, which will be discussed below. In general, the market made good use of these voiced theses in advance, while Yellen did not provide any reasons for volatility to surge.
The Former Fed Chairman avoided specifics, and the format of the meeting itself did not involve discussing any specific issues. She presented herself to the senators in the role of the future finance minister, so she talked about key issues in general terms. The reaction of the currency market was naturally matching: the dollar index remained above the 90-point mark, and the configurations of the major dollar pairs almost did not change. Before Tuesday ended, the US dollar slightly plummeted throughout the market, but it is not due to Yellen's pressure, as she only did a small role here. But even if it didn't give impulse to the further growth of the USD (contrary to the expectations of some experts), it still didn't push it down with its rhetoric.
In my opinion, the issue of the US dollar is different: dollar bulls cannot find a pivot point to develop the trend further. The $ 1.9 trillion "American Rescue Plan" unveiled last week is still pending to be considered by both houses of Congress. And although the Democrats control not only the House of Representatives, but also the Senate, it is still unlikely to talk about the adoption of this package as a done deal, since the Democratic Party has a low advantage in the Upper House. The balance of power there was divided into 50/50 – US Vice President Kamala Harris will get the decisive vote, who is a representative of the Democratic Party. In this case, the absolute and unconditional support of the Democratic senators is necessary. However, it is unclear whether the Democrats will show such a unification of views.
It is also noteworthy that the dollar lost another support in the form of growth in Treasury yields. In particular, the yield on 10-year Treasuries peaked on January 11 (1.144%). The last time the profitability was recorded at such a high level was almost a year ago (February 2020). Unfortunately, it was not possible to develop a further rally, which resulted in a decline. If the downward trend continues, the indicator will return to the psychologically important 1% level this week. However, even if we look back at the dynamics of the past few days, we can come to a clear conclusion: the yield of treasuries is declining, dragging the US currency with it.
At the same time, the US stock market continues to show signs of recovery after the well-known collapse in early January. In particular, the key indices such as Dow Jones Industrial Average, S&P 500 and Nasdaq Composite, increased again yesterday, reflecting investors' risk appetite. There is also another factor that plays a role here: the season of corporate reporting is approaching. However, it should still be noted that the safe dollar, which is in high demand during periods of uncertainty and surges in anti-risk sentiment in the market, has been left out. In the meantime, the opposite process is observed: traders are showing more interest in risky assets, while the demand for the US currency has noticeably fallen. The US dollar index, which is slowly sliding towards the base of the 90th figure, confirmed this.
In turn, Janet Yellen could not fulfill the role of "infodriver'', but there are several that can be distinguished among her voiced rhetoric. First, she said that she would not seek to devalue the US dollar: in her opinion, the dollar should be determined by the market. The future finance minister also spoke out against the fact that other countries manipulated the exchange rate (devaluing it) in order to gain a certain competitive advantage. Yellen assured the senators that she would oppose such practices, together with President Biden.
However, the market already knew the speech in advance, since American journalists published its content the day before the speech. Nevertheless, there were some slight surprises: Janet Yellen said that if her appointment is approved, she will review the US sanctions policy. According to her, she will instruct her deputy to conduct a comprehensive review of this issue so that the restrictions imposed are used for strategic purposes and appropriately. At the same time, she called China "an important strategic competitor" and to counter which, it is necessary to increase the competitiveness of the American economy. At the moment, it is difficult to draw any broad conclusions from these words, but at the same time, it can be stated that Yellen takes (so far) a softer position towards China, compared to Steven Mnuchin and even more so, compared to Donald Trump.
In view of the dollar's weakened positions, we can consider long positions in the EUR/USD pair. It is quite risky to buy the pair until yesterday, since Yellen could strengthen the bearish mood. However, the dollar bulls did not receive a corresponding trump card. The euro, in turn, received support from macroeconomic reports: the December ZEW indices came out much better than forecasted (both the German and the European one).
All this allows us to consider long positions to the first resistance level of 1.2205 (midline of the Bollinger Bands, which coincides with the Kijun-sen line on the daily time frame). If buyers of EUR/USD manage to break through this level, the price will be initially between the middle and upper lines of the Bollinger Bands indicator on D1. Secondly, the Ichimoku indicator will form a bullish signal "parade of lines", opening the path to the upper line of the Bollinger Bands, coinciding with the level of 1.2330.