The market is risk averse. Asian stocks fell with Japanese Nikkei 225 made the biggest decline since May 2013. As markets in China, Hong Kong, Singapore and South Korea stay closed for Lunar New Year holidays, liquidity contracted and price moves have become more volatile.
The International Energy Agency (IEA) went out with a report, according to which the possibility of an emergency meeting between OPEC and non-OPEC countries is very low. The IEA expects oil stocks to keep increasing in 2016 and prices to remain under pressure – obviously, bad news for oil. Brent tested levels below $33 a barrel. US crude oil inventories are due at 15:30 GMT on Wednesday.
The worries of the market are deeper than falling commodities and the negative impact on emerging nations. Investors fear that loose monetary policy of central banks won’t help to encourage growth in advanced economies. EUR, JPY and CHF are bought as safe haven currencies. Still, the ECB and the Bank of Japan certainly don’t welcome such dynamics, and there’s a high risk of verbal interventions from their authorities.
The highlight of the day will be the Federal Reserve’s Chairwoman Janet Yellen testimony to the Congress at 15:00 GMT. The main question that interests the market is how many rate hike the Fed will do this year. The most likely scenario is that Yellen will sound the same as her deputy Stanley Fisher, who spoke a week ago. Fisher acnowledged growing global volatility and was cautious about the rate hikes. Note that traders are quite ready for such an announcement – it is already priced in – so the main risk for the market is that Yellen is more positive.
USD/JPY tested 114.20 approaching the key support area of 114.00/113.95 (bottom of the weekly Ichimoku Cloud, 23.6% of 2011-2015 advance). Dovish Yellen will increase pressure on support making dollar continue sliding against the yen. Note that the move below 113.95 will confirm a reversal. There won’t be much of support for a long time. If Yellen is more optimistic than expected, USD/JPY will try to re-settle above 116.00. EUR/USD may test resistance at 1.1300, 1.1340 and 1.1440. Support is at 1.1150. British pound doesn’t have much strength in the current environment and should attract sellers on attempts to recover. The UK will release manufacturing production at 09:30 GMT. Resistance is at 1.4500/25 and 1.4660, while support is at 1.4340 ahead of 1.4228. Technical picture for AUD/USD became more bearish. There’s still support at 0.7000 before 0.6935. The bulls may try to slow and reverse the decline on the run up and after Yellen’s comments.