Why Hasn’t the Euro Broken Higher? Key Elements Worth Watching
Fundamental Forecast for Euro: Neutral
- Euro rallied on pre-FOMC pullback for the Greenback
- EURUSD was leading the charge, but…
- …what’s getting in the way of a EURUSD rally or US Dollar bounce?
The Euro surged to multi-month highs only to quickly give back its gains as the US Dollar bounced back. The single currency has been unable to hold its gains, and a relatively modest week of forex event risk ahead gives little hope of major breakouts or breakdowns.
All eyes have been on the US Federal Reserveand theso-called “Taper” of its aggressive Quantitative Easing measures, but the potentially pivotal release of US FOMC meeting minutes failed to break the EURUSD out of its recent trading range.
We’ll watch the coming week’s US GDP growth estimates, Consumer Confidence, and Durable Goods Orders data for any further clues on the Fed’s next moves. European event risk will be limited to German IFO business confidence survey results and CPI inflation data, and neither events seem especially likely to force big forex moves.
The fact remains that forex volatility remains low through the final week of August trading. It’s likewise clear that markets remain on edge ahead of what promises to be a busy month of September. The US Fed is expected to announce “taper” at its September 18 meeting, but we’re obviously interested in watching for any other catalysts that could force major shifts in market expectations.
In a recent special report we argue that two main factors are holding the US Dollar back from a larger reversal: volatility and positioning. On the volatility front, we think that the so-called “Fear Index” in the S&P 500 VIX seems cheap given clear risk of September fireworks. Volatility expectations for the Euro and other major currencies are likewise trading closer to year-to-date lows than we would expect. So what could change all of that?
The continued sell-off in US Treasuries and broader global markets serves as early warning for bigger S&P 500 and US Dollar moves.
Conditions feel entirely too quiet—particularly as the threats to global markets seem so obvious. But going “long volatility” or holding safe-haven currencies such as the US Dollar can be expensive in quiet market environments.
Something’s got to give, and we’ll look to the coming week to clarify market expectations and give a clearer picture of price action through the final quarter of the calendar year. – DR
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