Yellen testifying to Congress, my joint favourite time of the year, twinned with when she does it 6 months later

Just so everyone knows how it's going to go down. We kick off at 13.30 GMT with the release of the text of her testimony. That's where the first market reaction will come.

We're going to be slapped with tons of headlines so we'll pick out the most pertinent ones then add the rest.

At 15.00 GMT she sits down in front of the firing squad and reads the testimony (cue grab a coffee, or do any of those household chores you've been putting off). Then she says "so" a few hundred times as she answers questions. Tomorrow it's rinse and repeat.

The important part is what she's going to say in the testimony. It's probably safe to assume that the market right now, and once again, has completely overreacted in its fears for the US economy and everything else. When I say overreacted, I mostly mean that in terms of how the Fed think. In essence it sees more doom and gloom than the Fed

What things could Yellen say?

The market will be looking to see whether the Fed is worried about the economy so soon after hiking. That's the basis of a lot of the reaction we've seen. Here's a few things that Yellen is likely to say;

  • The economy is still doing fine (consumption, inflation, jobs market)
  • The Fed keep their view that the path of hikes will be gradual and monetary policy is appropriate right now, and it's all data dependant
  • The US economy faces headwinds from external factors
  • The Fed doesn't expect the market volatility to affect the US but is watching
  • The Fed is ready to act to counter any negative risks to the economy

If she sticks to the script from the last couple of FOMC's then the dollar could be soothed. If she gets into the possibility of the Fed turning more dovish, something like the bold line above, then the dollar could get hit hard again. It will depend on the severity of any comments. It would be pretty remiss of her/the Fed to ignore the possibility that things could turn sour so there is scope for her to drop a line like that in.

Overall I think she will run right down the middle of the road as usual and repeat the mantra that everything is data dependent. While the Fed has its forecast path for rates (the dots), they're not set in stone and it's the market who is jumping around and pinning hikes on various timeframes, so it's the market that's at fault if they don't happen. I don't see any reason why she would show concerns about the hike two months after pulling the trigger.

What's the trade?

I've fallen asleep through enough of these testimonies to know that very rarely does she drop a big bomb or stray from the current FOMC script.

There's risks to the dollar both ways but I feel that the market is going to be disappointed if it gets any of its hopes up that Yellen is going to come to the dollars rescue by way of neutral or hawkish comments, unless she pulls a rabbit out of the hat. That's something she very rarely does.

Right now everyone sees doom and gloom and so we know which way the market is leaning. Any moderate comments that send the buck higher are likely to be faded, so note the big levels above here (115.50, 115.80/85, 116.00)

Anything that hints that the Fed might go on a protracted hold or backwards and we'll get a test of the strong developing support at 114.20/25

Always be ready for the unexpected and have your trading path planned out for both mild and extreme headlines. Otherwise grab the popcorn, kick back and watch the US political machine in action. Then after an hour go and do something interesting instead ;-)

Yellen gets geared up for Congress