For The U.S. Dollar, Janet Yellen's 'Guidance' May Matter Most

The USD weakened considerably over last week, as traders played down the possibility of another rate hike this year. On Wednesday February 3, the US PMI Services Index came in weaker than expected at 53.2, versus the 53.7 consensus. Friday Non-farm payrolls data for January was also somewhat disappointing as it missed the consensus of 188,000, coming in at only 151,000. As a result, markets are pricing in a very dovish Fed, as they fear the economy is potentially headed for recession. The USD has weakened considerably over the week, with the EUR/USD standing at 1.115, regardless of a dovish ECB.

Bearish bets on the dollar gained momentum after New York Fed President William Dudley suggested on February 3 that tightened financial market conditions might hinder the Fed from raising rates again soon. All eyes are on Fed Chair Janet Yellen now as she is expected to testify in front of Congress on February 10 and 11. The market will closely watch out for her outlook on the economy and monetary policy guidance.

Even though the market seems to be pricing in a dovish Fed, a surprisingly optimistic and hawkish comment from the Fed Chair could ignite a lucrative rebound in the USD. Whilst the non-farm payrolls may have missed the consensus estimate, there are some positive aspects to the jobs report as well. Wage growth came in at 0.5 percent against the estimated 0.3 percent. The unemployment rate also fell to an 8-year low of 4.9 percent. Hence, a hawkish tone from Janet Yellen should not be ruled out. A surprise from Janet Yellen may stir a USD rally against the Euro and Yen, creating a bullish trading opportunity. Keep a close eye on Janet Yellen's guidance this week.