Later today the Chair of the Federal Reserve, Janet Yellen, will be giving her regular biannual testimony before Congress. This is an important event as it gives her an important chance to more clearly signal the intentions of the Federal Reserve regarding its implementation of monetary policy. Monetary policy concerning the U.S. Dollar is probably – more than any other factor – the greatest fundamental influence on Forex exchange rates, which over recent years have shown a strong tendency to be driven by the U.S. Dollar.
The major question over American monetary policy at present is how quickly and when further rate hikes are going to arrive. There is a consensus that the Federal Reserve is obviously on a course of tightening monetary policy, so the market is expecting rate hikes: to be precise, three more increases over the course of 2017, with each increase equaling 0.25%. However, some pundits are tipping Yellen to signal tonight that there will in fact be four increases this year, and that the first such increase will come as early as next month (March). The major arguments behind this reasons are that the fundamental data over recent weeks have suggested the U.S. economy is improving faster than expected, and that President Trump is expected to begin meaningful tax cuts soon, which would logically have the effect of stimulating and heating up the economy.
Recent weeks have seen the strong multi-month bullish trend in the greenback tail off and even show signs of beginning to reverse, with some currencies, such as the Australian and New Zealand Dollars, as well as precious metals, reaching multi-month highs relative to the U.S. Dollar. If Yellen gives a strong hint of a hike next month in March, there could be a Dollar surge, and a re-establishment of the bullish Dollar trend.
