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Jackson Hole Main Event Threatens to Revive or Reverse EUR/USD 2017 Trend

Jackson Hole Main Event Threatens to Revive or Reverse EUR/USD 2017 Trend

Talking Points:

  • Though the debt ceiling cliff is still a very real threat, the market allowed distraction to drift markets back to complacency
  • Day two of the Jackson Hole Symposium is the top billed with scheduled speeches from ECB's Draghi and Fed's Yellen
  • Top volatility candidate is EUR/USD, but mind all Dollar and Euro pairs, general risk trends and gold

Speculative futures traders are still holding excessively long EUR/USD and short Dollar positions. How are retail FX traders positioning for both the benchmark pair and currency. Check out the DailyFX Sentiment readings to find out.

We are far from a satisfactory resolution on US debt ceiling crisis and the implications are potentially devastating to the global financial market stability, but a familiar trait of the market's temperament has returned. Complacency is one of the most common features of our landscape. Unless there is a tangible crisis, the markets seem willing to drift through a slow erosion of the confidence and safety. That will inevitably change, but not yet. With the expectations of seasonal lull through the second half of August, the markets are more than willing to let more imminent events play distraction and occupy evaluations of scenarios. Currently, the Jackson Hole Economic Symposium hosted by the Federal Reserve is providing headlines for speculators to follow. Thursday was the opening day of the three-day event, but there were no dramatic revelations to speak of. The highlight for me were remarks from Fed members Kaplan and George. Both held the 'party lines' when it came to monetary policy projections, but the former suggested a market correction may not be troubling and the latter that asset appreciation may have been at least part of the motivation for the Fed's massive accommodation effort over the years.

The main event for the gathering of central bankers, economists and academics is Friday's session. Rather than scanning for sideline comments, investors will be eagerly digesting what Fed Chairwoman Janet Yellen and ECB President Mario Draghi has to say in their respective speeches. Ms. Yellen is due to speak at 14:00 GMT and she has proven herself remarkably skilled with personifying the Federal Reserve's consensus view. Given her interest in not causing market volatility, she will likely attempt to strike as neutral a tone as possible. However, given the dovish shift the market registered in the group's tone particularly via persistently weak inflation in the recent minutes, the market is too conflicted and sensitive to just overlook the remarks. Of the two, Draghi's remarks carry the greater potential. He too will attempt walk the status quo line, but here the market anticipation is far greater. The Euro has advanced aggressively throughout 2017 on very early speculation of an eventual turn from dovish to neutral bearing. Considerable premium has been afforded to this anticipation which means there is much to justify and much to lose.

Given the opposite ends of the monetary policy spectrum these two central banks occupy, EUR/USD will be one of the most at-risk targets for volatility. Congestion over the past few weeks add pressure to the months of buildup. On a fundamental and technical basis, a drop from this benchmark can run further and faster - though a bullish break is certainly possible if properly motivated. Other Dollar pairs (USD/JPY, AUD/USD, USD/CAD) are attractive for their own reasons; but don't present the same opportunity. It is the Euro crosses that should be monitored more closely though given the premium leveraged for the shared currency. EUR/GBP, EUR/JPY and EUR/NZD are represent particularly tradable pairs. While much of the focus will go to the currencies that face the most direct exposure, traders should keep Gold charts up as well. If the two most liquid currencies in the world both come under pressure, it will significantly bolster the precious metal as a reserve against collective fiat. And, do remember that we are heading into the drain of liquidity as the week ends. If there is a fundamental change in these main players or the system, expect the move to carry through to the new week or wait to truly respond only after liquidity returns. We weigh the EUR/USD and other opportunities for the Friday session and further out in today's Trading Session.

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