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Dollar Rally Stalls Ahead of FOMC, US Stocks Rounding Off

Dollar Rally Stalls Ahead of FOMC, US Stocks Rounding Off

John Kicklighter, Chief Strategist

Talking Points:

  • USDollar was rallying to close out this past week, but follow through quickly stalled before key breaks
  • Yen crosses are facing high expectations of volatility, Pound will walk a Brexit mine field of event risk
  • USD/CAD and EUR/CAD break from clear wedges, but oil correlation may prove a hurdle for follow through

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

One of the strongest moves to close out the previous trading week would come on the behalf of the US Dollar. While the USDollar index charged higher to close at a nearly five-month higher, key crosses were put in position for critical technical breaks. EUR/USD hit a 2016 trendline support at 1.0950; USD/JPY stood just below upper bound of its descending trend channel; and GBP/USD returned to 1.0365 to pressure a move with overt threats to retest post-Brexit lows. While pushed to the edge, the market simply wouldn't jump. With FOMC 36 hours away and a range of critical global event risk, there is understandable reticence to forge new highs with such uncertainty ahead.

Conviction was already fading on the 'risk' front, and concern over the volatility ahead only further curbed ambitions to rally shares and other sentiment driven assets. The S&P 500 in particularly continued to round out from its rally to start out the month. With a five-day ATR (average true range) in territory associated to the quietest periods of the past two years, the overt risk of impending break leverages the fear of a bearish resolution. In a speculative vacuum, the high-level event risk due this week would represent an equal opportunity to motivate another leg higher in such assets as much as tumble. However, context matters and anticipation and market position will likely temper the reaction to 'positive' outcome while leaving any disappointments to significantly undermine current exposure.

Looking out over the peaks and valleys of event risk ahead, Tuesday's session offers noteworthy data; but the heavy-hitting items start Wednesday and fill-out the second half of the week. Anticipation will discourage many from taking ambitious risks without knowing the outcome. In the meantime, the Canadian Dollar has seen a remarkable move alongside oil with tempting breakouts from USD/CAD and EUR/CAD. Yet, neither the commodity nor the currency will be able to move outside of the orbit of latter event risk like the Fed decision and global GDP figures due. For the Pound, a close eye should be kept on a steady round of post-Brexit data that will offer a clear evaluation of economic impact for this critical fundamental shift. The Sterling will likely remain highly susceptible to volatility founded on such event risk so it is important to remain diligent. We market currents and the influence of impending event risk in today's Trading Video.

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