On January 6, 2014, Janet Yellen was named the new chairman of the U.S. Federal Reserve. This news marked a turning point in U.S. history not only because Yellen became the first women to hold this position in U.S. office, but because she is now the active chair of only 15 office chair holders over the years.
Aside from the fact that Yellen’s term could mean big changes for future governmental actions (or a lack thereof), Forex traders are taking notice of her past political actions in anticipation of potential U.S. dollar trading opportunities to come.
By James Bishop, Market Traders Institute, Inc.
Ben Bernanke, Yellen’s predecessor, has been partially credited for keeping the U.S. economy from collapsing during the Great Recession due to his quick efforts in plugging the holes in the sinking ship that was the United States economy. However, in looking at the EUR/USD, traders can visibly see that this pair has formed a downward pennant over the past several months. And, in the USD/JPY, we’ve seen after 61 months of the USD weakness followed by two years of strengthening. These trends across multiple currency pairs only strengthens the proof that the USD has indeed been strengthening over recent months, but that the economic state that Yellen is inheriting from Bernanke’s days in office still has a long way to go.
Janet Yellen comes from the school of Keynesian economics and she is considered to be more dovish than hawkish. The question is, how will this affect the Forex market? In theory, Keynesian economists believe in maintaining low interest rates and increasing government infrastructure investments. One of the biggest principals that Keynesian economists believe in is reaching full employment levels. The principals in Keynesian economics are what helped push the United States economy out of the Great Depression from 1936 onward through to restoration and, if Yellen’s past Keynesian sentiment continues, we could see similar motions and a raising value in the USD index and corresponding currency pairs.
With these influential principles in mind as we predict Yellen’s future (and subsequently that of the USD), I personally feel that efforts toward total employment would reflect positively in the U.S. economy and in the value of the USD. These efforts could create more tax revenue for the government and return the United States to economic times that would mirror what we saw during the Clinton Era. From Chairman Yellen’s past actions, she is openly a big proponent of raising the national minimum wage. Such a raise would allow people to save more (in an ideal world), allow banks to lend more, and could result in a nation of people better prepared to spend more thus pumping money back into the economy. Again, this would theoretically cause rallying in USD crosspairs in a manner in which USD traders could act upon.
The next principal that Janet Yellen is known to believe in is the Philips Curve. The Phillips Curve shows an inverse relationship with unemployment and inflation rates. If the U.S. can return to record level lows for unemployment, then inflation may decrease as a result therefore stabilizing the economy’s current strengthening trend. If this prediction is correct, USD traders should expect this positive news to break the pennant formation to the north in USD pairs.
In summary, I feel at the end of his term, Bernanke was implementing some of the same Keynesian policies that we would expect Yellen to uphold. As currency traders, we have the ability to make money whether USD pairs move bullish or bearish as long as we set contingency plans ahead of time. If Yellen’s future policies match her past political positions, traders could expect the USD’s value to continue to rise. As a trader, this is exciting news because nothing makes trading more simplified than a specific currency focus and a predictable direction.
Further reading: FOMC Minutes sees economy on track, reflects new hawkish composition
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