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Forex Trading Video: Dollar Extends Rally into Holiday Liquidity Drain

Forex Trading Video: Dollar Extends Rally into Holiday Liquidity Drain

2016-11-24 00:57:00
John Kicklighter, Chief Strategist

Talking Points:

• Despite the expected drain on liquidity with the Thanksgiving holiday, the Dollar charged to a fresh 13-year high

FOMC minutes and a range of rushed US data offered an optimistic view, but lack for real fundamental support

• An expected increase in deficit and decrease in growth forecasts from UK Autumn statement doesn't alter Pound course

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

With liquidity running short on time as the US holiday period rushed on, the Dollar made a remarkable extension to its already impressive rally this past session. The ICE DXY Dollar Index posted another 0.7 percent climb which entailed gains against all of its benchmark's major counterparts with the exception of the Pound. That leaves the Index at fresh 13 year highs and in contact with technical barriers that we have to look back decades to appreciate the scope on. That said, such a move before a market drain doesn't provide a stronger platform for late-in-the-day participation.

I decided to remain on the sidelines through the Dollar's due to my concern for the source of its strength. A combination of cannibalized growth expectations from global counterparts and a leveraged rate forecast has provided enough backing to lift the currency; but this is not a particularly robust backdrop to project strength through different scenarios into the future. The backdrop is certainly not appealing enough to pull me into a trade during the liquidity lull we will see through the Thanksgiving holiday. Event risk this past session between durable goods and housing data is positive, but lacking for depth. The FOMC minutes did reinforce the forecast for a December hike, but progress depends on what happens in 2017 and that will require nothing short of a clear inflation surge or definitive forecast given by the Fed itself at the December 14th meeting.

As markets stew on the mix of fundamental and technical potential moving forward as the US rests, my interest will be on the conviction that rate forecasts and questionable growth disparities generate for a pair like EUR/USD. This most liquid of crosses is at the bottom of a two-year range that is itself a low not seen in over a decade. A break or reversal here will be decided in more active and liquid conditions. Meanwhile, I remain skeptical of the risk run especially for the S&P 500 and USD/JPY (representing the Yen crosses). We assess the scenarios that can guide these benchmarks as well as review the comparatively reserved response from the Pound to the Autumn Statement from the UK Chancellor of the Exchequer in today's Strategy Video.

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