20.01.202117:19 Forex Analysis & Reviews: Yellen and Lagarde on exchange rate and monetary policy

At five minutes, US Treasury Secretary nominee and part-time "iron lady" Janet Yellen recommended lawmakers not to delay the aid for the American economy. This means that money will now begin to be distributed quickly and to everyone who needs it. In general, Yellen's performance was sluggishly received by the markets. Perhaps this is due to the fact that it was quite predictable, and little attention was paid to the topic of the dollar and rates.

Yellen said the US currency should be market-driven. This is what the experts predicted. At the same time, the official did not mention the strong dollar policy. Perhaps the expensive dollar is not very much needed by the United States.

However, a late reaction of investors to Yellen's words is not excluded. After a more detailed study of Yellen's speech, they can change their point of view. Still, there are some fateful moments in her comments. Apparently, tax relief for big business will be canceled, and it is too early for China to relax. According to Yellen, China a major strategic competitor to America.

Investors have a mixed impression of the future US treasury secretary's speech. On the one hand, incentives instill optimism, which means that the growth of risk appetite will continue. On the other hand, the plan will give the coronavirus-stricken economy a completely unnecessary boost right now. Large-scale support measures can expand the already huge deficit, increase the yield of Treasuries while supporting a rally in stocks

The topic of raising taxes for the rich was also controversially received, since it is not yet clear when and how much they are planned to increase. Yellen agreed that Donald Trump's 2017 corporate tax cut improved the competitiveness of U.S. businesses, noting that Biden is unlikely to raise corporate taxes to levels that were before Trump cut them. However, she believes that large companies and rich people should pay their fair share. What does fair share mean? This question probably remains open.

The only thing that can be said with confidence now is that the general policy and some non-standard approach of Trump will be rooted out by the new administration of the US president. For example, the markets will not be affected by the volatility associated with tweets.

Dollar weakness

The main event of the trading environment should be Joe Biden's inauguration, but the markets are more focused on his policies than on the ceremony.

Janet Yellen did not express her special opinion on the further direction of the dollar, which continued the downward trend. However, during the hours of the American session, the dollar again began to show signs of life, gaining in price in relation to six main competitors.

Although the dollar index is strengthening on Wednesday and has strengthened in recent weeks amid rising Treasury yields, investors are still betting on the weakening of the US currency.

"We remain bearish on the dollar and expect a resumption of the downward trend when real US yields peak," write currency strategists at CitiFX.

Positioning data suggests that market players are mostly shorting the dollar. In their opinion, the budget and current account deficits will put pressure on the dollar.

As for the euro and the ECB meeting on Thursday, no change in the course of monetary policy is expected here. However, the leadership of the Central Bank may well "play" on the nerves of euro buyers. Today, the major Forex pair is declining in anticipation of Christine Lagarde's press conference and amid signs of a recovery in the dollar.

There are more headlines in the press about the extension of lockdowns, which threatens the eurozone with a double recession. In addition, the Euroblock countries are lagging behind in the rate of vaccine distribution from the same UK. This puts pressure on the euro and changes the alignment before Thursday's meeting.

"Despite the fact that the meeting will be held without any special events in terms of political statements, the market may receive some signal of a possible easing of monetary policy in the future. In addition to this, President Lagarde may again lower the euro, which explains the lagging for today," write analysts of investment banks.

The 90.5 mark is important for medium-term and even long-term trends in the dollar index, but it has not yet been consolidated. Progress in this direction on Wednesday is obvious but rather fragile. The market, most likely, is being laid in fresh drivers, and this is the ECB meeting and Lagarde's press conference