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Where Should We Expect the EUR/USD's Rally to Find Sustained Lift?

Where Should We Expect the EUR/USD's Rally to Find Sustained Lift?

2017-05-17 01:44:00
John Kicklighter, Chief Strategist

Talking Points:

  • EUR/USD has charged to a six-month high, but its drive higher doesn't seem to carry clear fundamental lines
  • Risk trends continue to inch higher with limited conviction and problem for those looking to play a trend
  • Top event risk will struggle for a volatility response and lack trend potential - UK jobs, Japan and Russia GDP, US debt

See how the DailyFX Analysts' 2Q forecasts for the Dollar, Euro, Pound, Equities and Gold are shaping up in the DailyFX Trading Guides.

There continues to be little enthusiasm associated to the record and multi-year highs set by the favorite risk assets for global investors. That does not bode well for those looking to conviction to build momentum behind existing exposure that carries increasing baggage in the eyes of warry traders. For the benchmark S&P 500, this week's progress to record highs struggles to even draw out more headline attention than the reference to the lackluster volatility behind the broader market. The activity measures remain as deflated as they've been these past weeks. The VIX may have found its way above the closely watched 10 figure, but the meandering below 11 (currently a 17 day count) is unprecedented. That doesn't add much in the way of new information, but it reminds us how extreme circumstances are and should direct our trading approach.

While quiet is pervasive, not everything is landlocked. The EUR/USD this past session extended a remarkable run. The three-day surge from this most liquid of currency pairs - arguably the most heavily traded asset overall - pushes a six month high and draws attention as well as hope that there is a light of opportunity in these quiet times. Yet, as with any trade candidate, we need to consider potential for follow through rather than simply be drawn in by volatility. If this particular pair is due a strong trend, its influence could shake up traders through the FX market - or at least Dollar and Euro-based pairs. When assessing the motivation, however, the questions outnumber the answers. While the ICE Dollar Index (DXY) has tumbled, it is heavily weighted to EUR/USD. When we consult an index that offers more even weight or just look to other majors, we don't see anywhere near the same conviction. In contrast, the Euro has leveraged strength across the board. That draws its own problems as the traditional fundamental fuel to this move is fumes. It doesn't look like it will find any top offs in the immediate future. This is a precarious upon which to place a continuation trade. It may on the other hand, shape a decent reversal should the certain cues present themselves.

Back on the Dollar pairs, GBP/USD and USD/CAD may reflect the better circumstances for our particular backdrop. As unappealing as these are from a sheer volatility perspective, these are not times to chase the ghosts of previous sizable swings or to preempt something that may take weeks or even months to show. Certainly the traditional docket won't help to shake us from these quiet conditions. Top (known) listings include: US debt figures; Japan and Russian 1Q GDP data; and UK employment. Of this round of event risk, the jobs statistics have the more appropriate historical precedence of measured move. Themes - like broad risk trends, global trade relationships, geo-politics, shifting confidence in global policy - will be moved by unplanned forces. In these conditions, trades placing heavier emphasis on conditions and technicals versus fundamentals is preferable. EUR/USD and USD/CAD may better answer those needs. We look at markets as they are in today's Trading Video.

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Where Should We Expect the EUR/USD's Rally to Find Sustained Lift?Where Should We Expect the EUR/USD's Rally to Find Sustained Lift?

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