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NEW YORK ( TheStreet) -- With Federal Reserve Chairman Ben Bernanke's testimony fast approaching, markets continue to look for an edge in figuring out what the Fed will do next.
Trading on Tuesday signaled that investors believe Bernanke will reiterate his commitment to helping the economy, which is bullish for riskier assets.
Since late May, global markets have questioned central bank commitment to aiding economies, which led to heightened volatility. Any form of clarity on Wednesday over continuing bond purchases will settle traders and should boost equities and commodity-linked currencies.
The first chart below is of
DB USD Index Bullish(UUP) over
CurrencyShares Japanese Yen Trust(FXY). This pair measures risk aversion in world markets.
The yen is a safe-haven currency, and experiences a rush of demand when fear enters markets. The Japanese currency has seen immense strength as investors fled riskier assets for fear of tapered easing in both Japan and the U.S.
As the pair reaches yearly lows, there looks to be a level of support underneath. Again clarity over the situation in the U.S. should bolster this pair, and because Bernanke is unlikely to remove all support for the economy just yet, investors should be more willing to invest in riskier assets after his testimony.
The next pair below is of
CurrencyShares Euro Currency Trust(FXE) over DB USD Index Bullish.
If Bernanke continues support for the Fed's bond-buying program on Wednesday, the euro should get a push higher. A sentiment survey over the German economy came out better than expected on Tuesday, which further brightened investor outlook for the European bloc.
The euro has gained as investors have fled the dollar over monetary policy uncertainty. European economies have steadily improved throughout 2013, and although they have not evaded all of their problems just yet, the extreme downside they once faced has disappeared.
Investors will be more willing to take risk if they hear what they want out of Bernanke on Wednesday, and again the euro should benefit.
The final chart is of
Consumer Discretionary Select Sector SPDR(XLY) over
S&P Equal Weight ETF(RSP), which measures the relative strength of cyclical stocks versus the broader U.S. market. Cyclical stocks are heavily tied to economic strength and a healthy consumer.