This week will see the world’s most influential woman, Janet Yellen, speak to the US congress; this will likely be a high volatility event for the US Dollar. The Dollar Index is a gauge of the strength of the US dollar against their trading partners; it is used to determine whether to long or short USD pairs. For example, if the outlook for the Dollar Index is bullish then we should look to buy USD-CHF or sell GBP-USD. A lot of traders and analysts will be watching Yellen’s comments closely with a lot of price action expected this week in the Dollar Index. The Fed’s Chairwoman will speak at 15:00 GMT on Wednesday as part of a two-day semi-annual testimony.

Friday’s drop in unemployment rates to 4.9% will make it more difficult for the Fed to act going forward. Labour markets appear to be tightening and the US economy is moving towards full employment but this is due to falling productivity. Wage inflation is also starting to pick-up. So Yellen will face a dilemma; continue to raise rates due to higher anticipated inflation from full employment and rising wages or hold off on any further rates based on crude oil’s drag on inflation and stock market volatility.

Any indication of which side the Fed will lean to will be eagerly awaited on Wednesday during Yellen’s speech. Other important speakers from the Federal Reserve this week include the president of the Federal Reserve Bank of San Francisco John C. Williams who could provide an indication as to whether the central bank is more concerned about inflationary or deflationary pressures.

If there is some signal that the Fed is more worried about the impact of low oil prices on inflation then this will be bearish for the US Dollar. In this case, the Fed is unlikely to raise rates much or at all this year. Some analysts put a date for the next rate hike in June. Currently, the futures market has only priced in a 50% probability of one rate hike this year and emphasis from the Fed on oil prices, volatile stock markets and the strong US Dollar will see selling pressure dominate in USD.

On the other hand, if the Fed emphasizes the return to full employment and growing inflationary pressures from wage growth then this would be considered bullish as the Fed will be looking to continue to increase rates to bring inflation under control. If more positive data comes out this week, this will also be considered bullish for the Dollar Index. For instance, Friday will also see some important data. Firstly, retail sales for January is due at 13:30 GMT and is forecast at 0.1%. Then at 15:00 GMT, the preliminary reading for the Reuters/Michigan Consumer Sentiment Index for February is released. A reading of 93.0is anticipated and a higher reading could see increased buying interest in USD.