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EUR/USD surges to 3-month high ahead of Yellen's Capitol Hill appearance

Published 02/09/2016, 05:44 PM
Updated 02/09/2016, 05:55 PM
EUR/USD reached its highest level in more than 13 weeks on Tuesday

EUR/USD reached its highest level in more than 13 weeks on Tuesday

Investing.com -- EUR/USD surged nearly 1% on Tuesday, jumping to its highest level in three months, as the dollar continued its prolonged slump ahead of a highly-anticipated appearance by Federal Reserve chair Janet Yellen.

The currency pair traded in a broad range between 1.1163 and 1.1338 before settling at 1.1290, up 0.0103 or 0.91% on the session. At session highs, the euro reached its highest level since October 21. Since slipping below 1.08 in late-January the euro has soared nearly 4% against the dollar. During that span, EUR/USD has closed higher in 10 of the last 12 sessions. The euro opened 2016 just below 1.09 against its American counterpart after plunging nearly 10%, a year earlier.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.

When Yellen testifies before the U.S. House of Representatives' Financial Services Committee on Wednesday, it will mark her first public appearance in 55 days and her first since the Fed abandoned a seven-year zero interest rate policy in December. Last month, as expected, the Federal Open Market Committee (FOMC) voted unanimously to leave its benchmark Federal Funds Rate at its current rate between 0.25 and 0.50%.

The current climate in global financial markets has changed dramatically since Yellen last spoke publicly before Christmas. Over the last two months, oil has plunged to 12-year lows below $30, the Dow Jones Industrial Average has lost approximately 1,600 points and U.S. fourth quarter GDP slumped to 0.7%, considerably below initial expectations of 2%. Arguably, conditions are even worse abroad. In China, GDP growth expanded at its lowest level in a quarter century last year, while in the euro zone stocks plummeted to a 16-month low on Monday, as the financial sector continues to recoil in large part due to the crippling effects of negative interest rates.

Yellen could address prospects of softer U.S. economic growth, tighter financial conditions and troubles abroad in the first of her two-day appearance on Capitol Hill. The most pressing issue could be the Fed's median forecast for the Fed Funds Rate, which suggests that the U.S. central bank could approve up to four rate hikes this year. While the general consensus among analysts is that Yellen could offer concessions on the pace of its tightening, she could also vigorously defend the Fed's decision to normalize monetary policy in mid-December. Before Yellen begins her testimony at 10 a.m. EST, the Fed will release its semi-annual Monetary Policy Report. Legislators who parse through the fine print, could receive critical updates from the Fed on the amount of liquidity in bond markets and the levels of slack in the labor market.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 1% on Tuesday to an intraday low of 95.68, before closing at 96.04. At session lows, the index fell to its lowest level since late-October. The dollar has tumbled nearly 3.5% since the FOMC released its latest monetary policy statement on Jan. 27.

Also on Tuesday, Deutsche Bank (DE:DBKGn) AG NA O.N. (N:DB) attempted to soothe investor sentiment after the second consecutive day of sharp declines in euro zone banking stocks. Deutsche Bank is also considering an emergency bond buyback program, according to the Financial Times, to repurchase several billion euros of its senior debt in an effort to prop up the value of its declining securities.

USD/JPY fell 0.45% to 115.14, rallying slightly after falling to a 15-month low at 114.24. It came after Japan became the first major economy to see borrowing rates for its 10-Year debt fall into negative territory.

Yields on the U.S. 10-Year lost two basis points to 1.73%, while yields on the Germany 10-Year gained two basis points to 0.23%. Government bond yields on U.S. 10-year Treasuries have fallen nearly 40 basis points over the last month.

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