Two different weeks, two different stories for the USD Index. This time last week, optimism for the US economy was running high and the USD index was looking to push through the 81.310 resistance level. One week later, and we are now testing the Bullish trend line, which has been in play for nearly four months.
It is being tested because last week, the USD suffered from a flow of continuous negative data. Manufacturing ISM’s showedthe weakest growth levels in eight months, followed by another substandard non-farm payroll result. In fact, in the past two months, the US economy has only added 189,000 jobs to their economy. It is expected that the US economy should be adding at least 180,000 jobs per month and we are now questioning whether the US economy has hit a speed bump, or brutal weather conditions have temporarily slowed economic growth.
This question is set to be answered on Tuesday 11th Febuary, when Janet Yellen is set to give her first testimony on monetary policy to the House. Yellen is highly likely to comment on the disappointing NFP results, and the tone of her answers will have huge consequences for the USD index. We have two likely scenario’s here. If Yellen’s tone is hawkish and she indicates that despite two weak NFP’s, the weather is accountable and the Federal Reserve will still continue taper QE regardless, then the bullish trendline will resume.
However, if Yellen is dovish and appears pessimistic about the current state of the US economy, then there is no doubt that the bears will awake. During Yellen’s Senate Confirmation hearing, she gathered mainstream attention for confirming that she was a big supporter of quantitative easing, and thought the benefits of QE far outweighed the costs. Bearing in mind last week’s poor economic performances, it wouldn’t surprise me if tomorrow, we witness deja vu.
In reference to my technical observations for the USD index, we can see that the bullish trend line is currently being tested. If you believe that last week’s negative data was purely down to the weather, and will serve as a minor blip on the road for the US economic recovery, then 80.955 and 81.310 can be implemented as resistance levels.
However, if you were under the illusion that the US economic recovery is still in a fragile position, or were looking for a dovish Yellen to talk down the US economy then 80.510, 80.250 and 79.960 are appropriate support levels.
Right now, only Yellen can determine which direction the USD index is likely heading. My personal opinion is that it is more likely to be heading lower, due to Yellen in the past being an outspoken supporter of QE. However, we have not heard Yellen talk publicly since her confirmation hearing, and her tune on QE may have changed since then.