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Profit Taking Driving USD, FX Ahead of Holiday Liquidity Drain

Profit Taking Driving USD, FX Ahead of Holiday Liquidity Drain

2016-11-22 12:34:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- DXY Index rally pausing, trading back to the highs seen in March and December 2015.

- Several key events tomorrow appear for one last hurrah before US Thanksgiving Holiday: Euro-Zone PMIs; UK Autumn Statement; US Durable Goods; and US FOMC Minutes.

- Political risk in Europe is heating up after Brexit and the US Presidential elections.

FX markets are starting to quiet down already as traders prepare for the mid-week liquidity drain around the US Thanksgiving holiday. The US Dollar, which has been on an absolute tear over the past two weeks, may see a pause the next few days as a result of the holiday: traders prefer to take profits and square their books before stepping away for an extended period of time.

For now, the key area to watch for support in DXY Index comes at 101.35/55, carved out between the daily 8-EMA and the former highs from March and December 2015. Given that both nominal US yields and inflation expectations are rising in the US, it appears that the recent greenback rally is the real deal. As such, pullbacks in DXY around the holiday this week should be viewed as opportunities to re-enter long positions.

Necessarily, if DXY is still poised for upside, then it's time to put EUR/USD into focus. The big picture: it's in the midst of an historic streak of price consolidation, but it appears to be coming to an end. Read our Q4'16 forecast, "EUR/USD Coil Grows Tighter as Central Banks, Politicians Face Credibility Deficit."

As markets wind down the next two days, don't dismiss the calendar. While today is a bit lackluster going forward, tomorrow has a good deal of excitement, holiday on the horizon or otherwise: Euro-Zone PMI data in the morning will be the best gauge for sentiment after the US elections; the UK Autumn Statement will help shape expectations for either a 'soft' or a 'hard' Brexit; and the November US FOMC minutes will be used as fodder to justify tighter policy at the meeting next month.

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, EUR/GBP, USD/JPY, USD/CAD, and Crude Oil.

Read more: Rising Euro-Zone, US Political Risks Driving EUR/USD in Short-term

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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