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EURUSD Running Out of Time: ECB Minutes, NFPs, US Rating Ahead

EURUSD Running Out of Time: ECB Minutes, NFPs, US Rating Ahead

2017-10-05 03:15:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The US equity market extended its euphoric charge higher with the S&P 500 securing a seventh consecutive advance (long run in 4 years) to record highs
  • Despite the Dollar's critical break last week, follow through has not been forthcoming with key event risk ahead that can cause problems
  • Traders should keep an eye on volatility readings in particular as they see greater role of speculative driver rather than simple activity measure

What are the DailyFX analysts' fundamental and technical forecasts for the Dollar, Euro, equity indexes and more through the fourth and final quarter of the year? Download the recently-released 4Q forecasts on DailyFX.

The market's speculative fever has yet to break. US equity indexes continued to lead the charge higher through this past session's close earning a fresh record highs for the S&P 500, Dow 30 and Nasdaq Composite. Furthermore, each earned an extension on already impressive series of gains - the SPX perhaps registering the most impressive performance of all with a seventh consecutive trading day advance which matches the strongest bull trend since July 2013. The conviction this performance would normally encourage however remains conspicuously absent. We do find global equities (German DAX, UK FTSE 100, Japanese Nikkei 225) enjoying some degree of the advance; but emerging market and high yield benchmarks are chopping along while the FX-based carry trade is outright flagging. Yen crosses like the USDJPY, CADJPY and AUDJPY which have every right to take advantage of the prevailing sentiment simply are not. And while there are circumstances where particular assets perform while others do not, such situations rarely carry the weight to justify the kind of record exposure that we currently find the market sporting.

While US shares continued to defy fundamental challenge, the nation's currency has not. The Greenback has outright struggled since producing the critical break forged last week when Fed Chair Janet Yellen offered an unexpected shove for bulls by suggesting the central bank should not act too slowly with normalizing monetary policy. She had another chance to awaken the speculative billows, but the otherwise reserve policymaker reverted back to her neutral bearing and avoided controversial remarks. FX traders certainly took notice, yet they were not too put off. Her balance was expected given her disposition for 'gradual' policy - both in vote and forward guidance - but data would offer a salvage. The disappointment from the in-line ADP private payrolls figure as a lead in to Friday's NFPs was overshadowed by the ISM's service sector activity report. Not only did the headline figure heartily beat the 55.5 forecast (with a 59.8 reading), but the inflation component jumped to its highest level since 2012. Those paying any attention at all know that the Fed had connected its reticence to tighten more quickly on the lack of price pressures. After this data reading, forecasts for a December 13 rate hike from Fed Funds futures rose to a remarkable 83 percent. And yet, the Dollar still struggles.

The standard for the Dollar's bearings and conviction remains its most liquid pairing: EURUSD. And, from this pair we are left with the technical disappointment of a head-and-shoulders 'neckline' break that has little-to-no follow through. The window to form a meaningful trend from this critical benchmark may be closing fast. In the upcoming 48 hours, we have a few key events that can revive, stall or even reverse this provocative early reversal in one fell swoop. Thursday, the ECB's meeting minutes from its last policy gathering are due. While we already know the outcome to that event, the real interest is in intention and expectation for the upcoming meeting where it is expected the group will layout plans for normalizing its extreme easing program. If they hint at early hikes or an aggressive reversal on QE, it can easily render the 1.20000 level fair value if not a discount to future value. From the Dollar's docket, the Fed speak and trade report due today pale in comparison to the NFPs and Moody's sovereign credit rating update due Friday. Both FX and risk-oriented capital market traders must remain limber. We discuss what risks and opportunities lie ahead in today's Trading Video.

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EURUSD Running Out of Time: ECB Minutes, NFPs, US Rating AheadEURUSD Running Out of Time: ECB Minutes, NFPs, US Rating AheadEURUSD Running Out of Time: ECB Minutes, NFPs, US Rating Ahead

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