- The liquidity drain has begun: trading conditions will be abnormal around the Thanksgiving holiday in the United States this week.
- US markets are closed tomorrow and only open for a half-day on Friday; key European data tomorrow may prove meaningful, however.
- Retail trader sentiment points to mixed trading conditions in the US Dollar around the holiday this week.
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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 trading weaker throughout November, may find reduced participation in markets a relief: traders prefer to take profits and square their books before stepping away for an extended period of time. It's not a set of circumstances that cater to breakouts and follow through on momentum, which has been working against the greenback's favor.
The damage to the US Dollar's uptrend from the September lows has been documented in recent days: the three-week range from October 26 has broken, as well as the uptrend from the September 8, 20, and October 13 lows.The neckline of what could be viewed as a potential inverse head & shoulders pattern at 94.29 was breached. Momentum has swung lower as well, with the DXY Index trading below its daily 8-, 13-, and 21-EMAs, and MACD and Stochastics trending lower (no longer in bullish territory).
As the technical damage done to the DXY Index has neutralized the US Dollar's bullish bias, two major pairs find themselves in ranges: EUR/USD and GBP/USD. While I'm not partial to trading ranges - I find them to be boring, to be frank - I do like what ranges represent: price consolidation. Price consolidation is akin to a spring coiling, storing up potential energy (the range), waiting for the release of kinetic energy (the breakout).
Chart 1: EUR/USD Daily Timeframe (July to November 2017)
After bottom on November 7, EUR/USD climbed sharply until it ran into the October 26 bearish outside engulfing bar high near 1.1837. Since then, price has oscillated between the high and what may have been the neckline of a potential head & shoulders pattern near 1.1715. In effect, this is a mirror image of the range carved out by the DXY Index since November 14, between 93.48 and 94.29.
Chart 2: GBP/USD Daily Timeframe (June to November 2017)
GBP/USD has been consolidating for a longer period of time than EUR/USD. Price broke downinto the 1.3018 to 1.3340 range on October 1 and has not traded outside of it since then.
The nearly two months of consolidation haven't been without drama: neither a BOE rate hike nor questions over UK Prime Minister Theresa May's leadership have proven meaningful enough to force a reckoning. For now, particularly as we look towards the holiday, we'll only want to keep an eye on this consolidation, but when the breakout comes, it should be violent.
As markets wind down today, don't dismiss the calendar. The October US Durable Goods Orders report is due out today, as is the November FOMC meeting minutes. Tomorrow has a good deal of excitement, holiday on the horizon or otherwise: preliminary October Euro-Zone PMI data to help guide growth expectations as Q4 data reporting gets under way; and the second release of the Q3'17 UK GDP reading.
Read more: DXY Index Firms Up, but Still Stuck in Range
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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