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EUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX Consolidates

EUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX Consolidates

2017-08-01 00:53:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The Dollar continued its tumble to close out July despite last week's solid US GDP and persistent FOMC bearing
  • Top event risk ahead includes the RBA decision, Eurozone 2Q GDP, US PCE deflator - but trading potential differs
  • Assets and pairs of particular interest ahead include: S&P 500, Bitcoin, EUR/USD, AUD/USD, AUD/JPY, USD/CNH and more

Both the EUR/USD and S&P 500 have clear significant resistance recently. What has this remarkable progress meant in terms of speculators' trading? See the IG positioning data on the DailyFX Sentiment page.

Resistance is losing out to momentum and a certain degree of fundamental complacency when it comes to EUR/USD. The world's most liquid pair - arguably its most heavily traded asset bar none - extended its 2017 climb to overtake 1.1800. Though there is enough relative chart presence to make this area significant, this was not an explicitly precise boundary on the charts. That is an observation that should be appreciated. Horizontal boundaries are less important than momentum and the fundamentals that would charge that conviction to fresh multi-year highs. That question of motivation is important for calling an end to the run but is just as important to evaluation its ability to sustain follow through. Trends are not rare in the markets, but trends with the hallmark of deep conviction are. This leads to slow-burn moves and/or lots of start-and-stop. Navigating this type of trading environment requires certain adaptations such as patience and tolerance for drawdowns. That is not the market approach I am currently employing for these conditions however.

Looking ahead for the next phase for this benchmark currency pair is a practice for better understanding the direction and activity of just the Dollar or Euro based pairs. The performance of this particular benchmark speaks to the forecast for the entire FX market, the influence of relative monetary policy and even the state of global risk trends. For EUR/USD's bearings, the Euro has done much of the heavy lifting as speculators have picked up on signs that the ECB was in the very early stages of turning the corner on its monetary policy. There is plenty of room for this currency to 'recover' but that also depends on the context of risk trends. The Dollar rallied well in advance of the Fed's first hike in part because the financial and economic conditions supported the measured turn. It was ahead of the curve. The ECB has been perpetually behind the curve. That leads to the question of where fair value sets in for closing the timing gap. That is a moving target, but the Euro will not have much cannon fodder to keep the bullish assault going unchallanged. The Eurozone 2Q GDP ahead is a key economic event, but the PMIs arguably hold more insight - though they are unlikely to move the market. There is relatively little on the Euro market at all this week. EUR/CHF will be an important check against the EUR/USD to judge the common currency's bearings.

For the Dollar, we have more event risk to account for, but the ISM manufacturing survey and PCE deflator will tap trends that have not been particular responsive (economic performance and monetary policy). Notably, the more liquid and restrained Dollar crosses (GBP/USD and USD/JPY) continue to show Dollar slide, but the most productive (AUD/USD, NZD/USD, USD/CAD) have stalled. The same performance imbalance should be considered across other pairs as it is worth remaining flexible to changes in conviction and priority. USD/JPY can prove an opportune bullish Yen cross if the crosses rally; while EUR/JPY, AUD/JPY and NZD/JPY are just a few pairs that are well staged for a strong bear shift if it were to develop. With the RBA decision on deck, the AUD/USD, AUD/JPY and GBP/AUD offer different virtues. Meanwhile, in a broader asset class context, many 'risk' related benchmarks continue to consolidate (like the S&P head-and-shoulders pattern), the Chinese Yuan is slowly recovering and Bitcoin is crossing the 'hard fork' deadline. We look across the markets for the opportunities, risks and misdirections to keep tabs on in today's Trading Video.

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EUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX ConsolidatesEUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX ConsolidatesEUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX ConsolidatesEUR/USD Climb Continues Through 1.1800, RBA Options Vary, SPX Consolidates

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