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Dollar Bounces as Risk Reaches, Market Awaiting Both ECB and Fed

Dollar Bounces as Risk Reaches, Market Awaiting Both ECB and Fed

John Kicklighter, Chief Strategist

Talking Points:

  • The Euro's unexpected rally after the Italian Referendum lost steam as focus now turns to the ECB decision
  • Between the EUR/USD slip and a mild risk appetite rebound, the Dollar advanced for the first time in 4 days
  • Conviction will be difficult to secure with major event risk ahead and prevailing trends stretched on speculation

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The Euro's rally after the Italian Referendum ran out of steam quickly. While the 'No' vote may have been an expected outcome, the course adjustment including political uncertainty, delays to banking sector support and likely gains in anti-EU sentiment do not bode well for the currency longer term. Further applying the breaks to the contradictory climb was the transition of power to the ECB rate decision scheduled for Thursday. While this event maintains the capacity to further lift the shared currency - perhaps if the ECB decides to Taper and international investors do not treat it as a transfer of risk from central bank to their own shoulders - uncertainty will work against establishing a clear trend.

Given the role the Euro played in forcing the Dollar into a high-profile technical break (head-and-shoulders pattern) via EUR/USD, the moderation disarmed the potential for strong follow through. Greenback bears were already relying on questionable, fundamental footing to project a lasting move before next week's FOMC decision. Without a committed move from its primary counterpart, that motivation will be even more difficult to muster. Rather than a question of bullish or bearish for Euro and Dollar, we are facing a backdrop struggling for any trend. That makes the EUR/USD's now tempting retest of former resistance (the 'neckline' in the aforementioned pattern) as support a dubious proposition.

As we have frequently found ourselves these past months, the more appropriate approach to operating in a market lacking the commitment to sentiment and focusing to key event risk ahead is likely shorter termed trades with more reasonable (closer) targets and stops. Pairs like GBP/USD show better circumstance for this approach with reaction to event risk forcing short-term technical breaks on clear and limited patterns. Ahead, the docket has a even smattering of notable event risk, but little to override the ECB and Fed countdowns. Tabs should be kept on risk trends as the crawl higher as the fundamental risks grow more prevalent. Traders in all assets should also make it a point to mark oil's whereabouts with the pullback from 52 rousing both overambitious bullish and bearish forecasts. We look at the markets drawing traders' attention in today's Trading Video.

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