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Why Might Next Week Finally Bring Big Euro and US Dollar Moves?

Why Might Next Week Finally Bring Big Euro and US Dollar Moves?

David Rodriguez, Head of Product

Why Might Next Week Finally Bring Big Euro and US Dollar Moves?

Fundamental Forecast for Euro: Neutral

  • Euro finishes just short of 7-month highs on Dollar weakness
  • Volatility is virtually non-existent as traders await the next major FX market catalyst
  • Upcoming US Nonfarm Payrolls data and a European Central Bank decision could bring big moves

The Euro finished just short of 7-month highs versus the US Dollar as the 4th-consecutive week of DJ FXCM Dollar Index (ticker: USDOLLAR) weakness left the EURUSD near recent peaks. Yet the coming week should provide much larger market moves and could ultimately decide Euro direction versus the US Dollar through the foreseeable future.

Traders look forward to a potentially pivotal US Nonfarm Payrolls labor reportto drive USD moves, while a European Central Bank (ECB) interest rate decision is top event risk on the European calendar.

And yet the two top-tier economic events have not been enough to drive volatility expectations out of their recent slump; EURUSD volatility prices actually trade near their lowest in six years. What gives?

It seems as though FX markets have been sucked into a self-sustaining cycle of lower volatility. Many cited market indecision ahead of a highly-anticipated US Federal Open Market Committee policy decision on October 18 as a reason for slow markets. The FOMC delivered a market bombshell and sent the US Dollar plunging versus the Euro and other major counterparts. But markets essentially became lifeless in the week following the Fed decision; the 5-day Average True Range in the EURUSD fell to its lowest levels since 2007 at a paltry 61 pips.

Will the ECB announcement and NFP results be enough to drive the EURUSD beyond its miniscule trading range? Current market conditions put low odds on huge moves. But a couple of things could happen to make the improbable breakouts occur.

If the ECB President Mario Draghi sets an especially dovish tone and hints at a fresh round of Long Term Refinancing Operations (LTRO), the Euro could suffer versus the USD and other major counterparts. Draghi and fellow ECB Governing Council members surprised many when they downgraded regional growth forecasts last month. Recent commentary suggests the ECB is at least mulling further policy easing, and any concrete rhetoric on the same could sap the Euro’s recovery against the downtrodden Greenback.

On the US side of things, upcoming Nonfarm Payrolls data promises big moves on any particularly large surprises. Why do markets care so much? The US Federal Reserve shocked many traders as it left its Quantitative Easing purchases unchanged through its recent meeting. In its commentary, FOMC officials emphasized that the next policy move would need to come on an improvement in economic data.

Consensus forecasts predict that the US unemployment rate remained unchanged in August on modest jobs growth. Any better-than-expected results could spark fresh speculation that the FOMC will taper in October—forcing the US currency off of recent lows.

Markets remain extraordinarily quiet and it feels as though traders are waiting for a catalyst to force the next major FX moves. Next week’s ECB and NFP results have as strong a chance as any to act as the difference-maker in EURUSD trading. - DR

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.