Monday is a holiday for America. People celebrate a federal holiday - Martin Luther King Day. Trading platforms are also closed, so the foreign exchange market is trading half-heartedly, due to the inertia of the past week. Nevertheless, the general nervousness that is associated with the inauguration of the newly elected President of the United States, Joe Biden, continues to push the dollar up, determining the configuration of the main dollar pairs. Volatility may significantly increase tomorrow – and not only because Americans will return to the market: on Tuesday, the Senate Finance Committee will approve the candidacy of Janet Yellen as US Treasury Secretary during a hearing. Congress will consider other candidates for other positions in the government, but traders will only be interested in Yellen's speech, especially against the background of an almost empty economic calendar.
The former head of the Federal Reserve will signal that the White House is returning to the so-called "policy of non-interference" regarding the exchange rate value of the national currency. Just four years ago, such things did not need to be discussed in a separate line. The policy of non-interference was the norm that Donald Trump violated for many years. Against the background of the diplomatic Democrat Barack Obama, the Republican literally shocked the markets at the time with his directness and protectionism.
For comparison, we can recall the case that occurred in the summer of 2015: the AFP news agency reported that Obama, during closed-door talks with the leaders of the Group of Seven, expressed concern about the high dollar exchange rate. At the same time, the news agency referred to an anonymous source in French diplomatic circles. Despite the dubious reliability of the published information and the non-public nature of the phrase itself (if it was uttered at all), the White House reacted instantly and with all seriousness. On the official website of the US president, it was stated several times that the head of state does not interfere in the issues of the foreign exchange market.
After four years of Trump's rule, such things already look somewhat archaic. As you know, Trump did not hesitate to express himself on this issue (as in many others) - he directly called the dollar exchange rate "inflated" and literally demanded that the Fed reduce the interest rate.
According to available information, Joe Biden's team intends to stop this practice. As noted by the American media, now the US Treasury Secretary will be the only senior White House official who will be allowed to comment on the situation regarding the exchange rate of the dollar in the future. The new (or rather" updated") communication policy implies that such statements will not go beyond "non-interference". That is, the Biden administration will refrain from verbal interventions, which the Republican president has so often used.
According to reports, Janet Yellen will say that the value of the US dollar, like other currencies, should be determined by the markets. Thus, it will oppose the artificial undervaluation of the exchange rate, and this fact can support the US currency.
On the other hand, such rhetoric will be expected. Therefore, if Yellen confines herself to the above theses, the market can calmly react to her speech. But if it gives any other information that is significant for traders, the volatility of dollar pairs will significantly increase. This information may relate to either tax policy (previously Biden promised to raise corporate taxes), or the implementation of the recently presented "Plan to Save America".
In my opinion, Janet Yellen will not disappoint dollar bulls in any case. The market may react phlegmatically to the wording already voiced in the media – but any surprises will certainly be in favor of the US currency.
In addition, the greenback will be used by the market as a protective tool in the coming days. Preparation for Biden's inauguration resembles a military special operation: By itself, the visual video series (the National Guard in Washington, the cordoned off area of the Capitol, barbed wire around the perimeter and concrete blocks on the roadway) already has an increase in anti-risk sentiment. At the same time, American security forces only add fuel to the fire, scaring the markets with reports that on the day of the inauguration, armed marches of far-right and Trump supporters will be held in all state capitals. Such nervousness will continue until Wednesday, and most likely until Thursday.
Thus, the continued interest in the dollar is primarily due to the demand for defensive assets. Yellen may well increase this interest, given the previous rumors in the American press. In the context of the EUR/USD pair, take note that the euro is under pressure from its own problems, including the political crisis in Italy and the prolongation (in some cases, tightening) of lockdowns in key EU countries. The current fundamental background contributes to a further decline in the EUR/USD pair in the short term. The target for the decline is the 1.2000 mark – this is the upper limit of the Kumo cloud on the daily chart. However, when this price area is reached, it is better to close short positions, since the 1.2000 target is a fairly powerful support level, which requires an appropriate information occasion to overcome.
