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Dollar Makes a Break, Will ECB Decision Force EUR/USD Next?

Dollar Makes a Break, Will ECB Decision Force EUR/USD Next?

John Kicklighter, Chief Strategist

Talking Points:

  • USDollar broke from a tight three-week range, but follow through looks to lack depth
  • The markets are pricing in little chance of new ECB QE Thursday, but traders remain wary given volatility
  • New Zealand Dollar crosses are mounting breaks and Canadian Dollar pairs look to be close to the same

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. What are the Traits of Successful Traders? See what our studies have found to be the most common pitfalls of retail FX traders.

After three weeks of tedious range, the USDollar finally posted a bullish break which raised interest in active trades among the majors. However, where there was Dollar posted gains against most counterparts the past few days; there is limited sense of a transition to trend that the Index seems to support. The strongest showings come from the lower liquidity AUD/USD and NZD/USD while EUR/USD and GBP/USD show limited traction. Furthermore, the fundamental motivation is more theoretical (safe haven, reserve concentration, a stable monetary policy position) than imminent and tangible. Unless risk throws its weight behind the Dollar's move, we may have to wait until the Fed decision or US GDP next week to find conviction.

Meanwhile, we have a distinct motivator scheduled for the coming session: the ECB rate decision. This event risk carries the profile that could move the market; but the likely scenarios don't support a high probability market reaction. The ECB has already pushed extreme measures in December and March - with notable skepticism from the market via a Euro climb and capital market slip. Economic benefit has followed in significant measure to match the programs, but that may take time. Action at this meeting may be seen as desperation rather than an effective currency bludgeon, and policy officials know it. Nevertheless, with FX markets as sensitive to such events and volatility as they are; traders should be on their guard.

Aside from the ECB meeting, event risk from Bloomberg's economist surveys for China and the UK are important given the market's lasting worry over the former and post-Brexit fears with the latter. There is action in some areas of the FX market such as the Yen crosses and the New Zealand Dollar. Follow through on USD/JPY has few fundamental footholds and little consistency in the crosses. Meanwhile, The Kiwi's drop has been consistent and heavy with NZD/USD in particular forging a strong swing lower. Perhaps USD/CAD and the Canadian pairs can be motivated to the same, but that will likely be the work of oil. We look where the markets are moving now and where they are likely to move ahead in today's Trading Video.

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