USDOLLAR Bull Flag Looks Promising, but Looks are Deceiving
FX markets are a bit slower on the draw today, but with good reason: there is a significant wave of event risk headed down the pipeline. While the US economic calendar is saturated with meaningful data today, the data will most likely only have a passing impact as traders keep an eye on the flashier headliners: the RBA policy meeting on Tuesday; the Fed's Yellen speaking and the BoC policy meeting on Wednesday; the Fed's Yellen speaking and the ECB policy meeting on Thursday; and the November US Nonfarm Payrolls report on Friday.
This type of environment can actually lead to diminished liquidity (which makes it a good time to review risk management principles, and even perhaps go as far as adjust your trading execution strategy to account for potential price gaps in less liquid environments). There's little incentive for market participants to stake out large positions before the week is through: there is a high probability that excessive leverage amid large price swings could knock out a position prematurely. So, lighter positions are being taken if they are being taken at all, and the moves that we've seen to start the week, particularly across the USD-pairs, are general continuation efforts that seem to suggest 'more of the same' in the days ahead.
'More of the same' is a reassuring concept, and for the USDOLLAR Index, that would appear to translate to a bull flag pointing to fresh yearly and multi-decade highs. But looks are deceiving; as we've been frequently reminded since childhood, 'don't judge a book by its cover.' In this case, despite what appears to be a fairly bullish setup, when we measure it against our expectations for what the ECB might do on Thursday and what the Fed might do at its December 16 meeting, and we can't help but feel that looks may be deceiving in the case of the USDOLLAR bull flag.
--- Written by Christopher Vecchio, Currency Strategist
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