Since Mid-November of last year, markets have been focused on 2 things; economic data and President Donald Trump’s words/deeds. In the upcoming week, you may see a shift back to the recently ignored 3rd wheel of the markets. The US Federal Reserve Bank.
This week, Federal Reverse Chair Janet Yellen will appear before the Senate Banking committee on Tuesday and the House Financial Services committee on Wednesday with a prepared speech and Q&A sessions. Equity market volatility is likely and currency market volatility is certain. The opportunity for traders during this combination of events is mouth-watering. There is so much that can move markets in these few days that trades with low risk and low probability may turn in your favor on a dime (keep in mind they can also turn against you). Let’s look at some of what may happen.
Yellen’s prepared speech may be hawkish; this is a very dovish Fed and based off this, many market participants believe that hawkish comments won’t happen. But the Fed has been warning us that aggressive fiscal policy could force the Fed to move more quickly on monetary policy. This tone could be highlighted in her prepared remarks, which will be pre-released, Republican Congressional members grilling Chair Yellen on the size of the Fed’s balance sheet; this could bring about fireworks in the bond market and the currency markets, especially Yen, Euro and Swiss Franc. Some Fed governors and FOMC members have made comments lately that the Fed may need to start looking at ways to shrink the balance sheet. If Chair Yellen gets pressed on this point and confirms these conversations are being had, bonds will selloff. Combine that with foreign investors recently shrinking their US Treasury holdings and yields could rise, while the dollar would fall.
Democratic Congressional members grilling Chair Yellen of her feelings about certain Trump policies; this is an almost certainty. Politicians are very skilled during hearings like this, at getting an answer that can later be used in speeches and sound bites. They will repeat and rephrase questions about the efficacy of certain proposals of President Trump and the Republican Congress, in order to try and get an answer they like. An answer that is contrary theses same policies. If Chair Yellen falls for it and the market believes the Fed is actually going to combat certain policies, then the stock market will suffer.
President Trump tweeting responses to any of the above; complete wild-card. There is no predicting what may be tweeted and what market reaction may be.
When you mix in the US CPI will be released Tuesday morning before the first hearing begins, you can expect to see movement that helps price-action based traders. So open your platform, grab your mouse and stand at the ready.
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