Forex Volatility Ahead as Uncertainty Lingers in Thin Holiday Trade

Wednesday will be an interesting day for financial markets and particularly forex markets, as volume begins to wind down ahead of the U.S. Thanksgiving Holiday on Thursday. But while volume will undoubtedly decrease, volatility may still be relatively high, especially during the early part of the U.S. session.

So what can we expect from this important trading session? The fact that the macro risks that have dominated trading this week and last week still linger suggests that risk aversion may continue ahead of the holiday. While Ireland has finally given in to the pressure of markets to accept aid, the concerns related to contagion, or “the next shoe to drop” remains. Moreover, a new risk that has developed is the political wrangling in Ireland, which may slow down the process of Ireland getting its finances in order.

10-year sovereign yields in Ireland increased 30 basis points on Tuesday to reach 8.4%, not far from the highs of 8.9% set earlier this month. Perhaps more importantly, yields on similar Portuguese debt advanced 18 basis points to 6.91%, just shy of the recent 7.04% highs. Finally, Spanish 10-year yields rose to almost 4.9%, the highest levels since 2008. Portugal and Spain are seen by many market participants as potentially the “next shoes to drop.” The latter is of particular concern considering that its economy is six times as large as that of Ireland, representing almost 10% of the total economic output of the European Union.

If yields on the sovereign debt of the “PIGS” continue higher, that will likely lead to more risk aversion, which translates into U.S. Dollar gains and Euro currency losses. On the other hand, if we see a reversal in yields, it would likely spur a corresponding reversal in the Dollar and the Euro.

That being said, the European debt situation isn’t the only meaningful event on traders’ radar. The skirmish between North and South Korea is a political risk that is obviously hard to quantify. Then there are some notable economic data points set to be released ahead:

If the data comes in much better-than-expected, perhaps it could lead to optimism and an increase in risk appetite.

Taking a look at EUR/USD, we see the pair has held 1.3340, which is former-resistance-turned-support. A break of that level exposes a rising trendline extending back to June.

EUR/USD Daily Chart: