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EUR/USD Inches Towards 1.20, North Korea Drives Yen and Gold

EUR/USD Inches Towards 1.20, North Korea Drives Yen and Gold

John Kicklighter,

Talking Points:

  • The DXY Dollar Index extended Friday's bearish break to trade lows not seen in over a year, but motivation was less clear
  • While the Greenback did slip broadly, EUR/USD was the only major pairing offering real progress - with Euro far more active
  • Where risk trends were generally stagnant through Monday, an afterhours North Korea launch charged anxiety

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.

This week opened to equal parts great expectations and deep skepticism. Through last week's close, the EUR/USD posted a break to more than two year highs that strong-armed the Dollar Index to the cusp of a definitive break. And yet, a convincing break from the Greenback was not widely established across the majors. With Monday's open, there was some measure of extension to last week's remarkable response to both the Fed and ECB heads providing little tangible guidance on their respective monetary policy bearings. EUR/USD showed a modest gap higher on the open with the DXY offering its fourth largest bearish gap in 2017 - a noteworthy development given the liquidity of the market and rarity of such jumps. With the benchmark pair just shy of 1.2000, the question now rests with where conviction will be found for either follow through or reversal.

Looking to the Dollar's performance outside of the EUR/USD's influence (which is the primary weighting for the DXY Index), there was far less intensity and a notable lack of technical progress through trend. Cable, USD/JPY, AUD/USD and others seem far less impressive in their efforts to undermine the benchmark currency. In contrast, the Euro's gains were far more wide spread and meaningful. EUR/GBP's progress at nine-year highs is just one of the crosses that supports a strength for the shared currency. But where is that optimism rooted? Event risk for the Eurozone was light to start the week and long-distance rate speculation is a risky theme to follow against a policy authority attempting to tamp such speculation and a strong dependency on absolute complacency. FX traders should keep a close eye on 1.2000 for EUR/USD, but monitor the Greenback's broad performance and reasonable motivations if you intend to take a view on any significant trends.

As we await a headline to strike a fundamental nerve or more significant event risk later in the week, risk trends were provoked in the early Asia session Tuesday. With global equity indexes little changed Monday, volatility measures like VIX holding low and more exotic risk-oriented assets little moved through Monday; it seemed clear that there was little spillover from last week's sentiment let down. However, news that North Korea had reportedly launched a missile whose trajectory took it over North Japan struck a raw nerve. Just two weeks ago, an escalation war of words between the US and North Korea unnerved the markets and led to a sharp decline in the S&P 500, jump in the VIX and other familiar 'risk' developments. Notably, that event stalled before motivating self-sustaining deleveraging across the financial system; so the markets will be cautious with settling on conviction. Meanwhile, the charge raised the familiar debate as to gold's position as a safe haven (having broke above 1,300 Monday), the Yen's fitness for a source of liquidity given its position in the recent story and the Dollar's lack of response despite its long-standing place in the spectrum. We discuss where sparks of volatility are more and less likely to evolve into meaningful moves 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.