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S&P 500 Recovery Lacking Drive, Can EUR/USD Finally Break its 3 Month Range?

S&P 500 Recovery Lacking Drive, Can EUR/USD Finally Break its 3 Month Range?

John Kicklighter, Chief Strategist

Talking Points:

  • Risk trends have swung back to the upside, but there isn't nearly as much gain or volume as there is volatility
  • A tame advance from the Dollar has nevertheless put the Dollar at the boarder of a three month range and the cusp of reversal
  • NFPs is top event risk though its impact is dubious; for further amplitude, watch USD/CAD with a simultaneous Canadian jobs release

Top event risk through Friday is the US NFPs due at 12:30 GMT. If you are trading the Dollar or markets with a sensitivity to risk trends, keep an eye on the impact this data can have. Join Strategists Chris Vecchio and Michael Boutros as they cover the release and market impact live. Sign up on the DailyFX Webinar Calendar page.

An Advance Without Conviction

The Dow put in for its first three-day advance since mid-February - during the recovery from the severe tumble at the start of that month. I look to gauge the genuine conviction behind risk trends by assessing the breadth of the sentiment shift as well as the intensity. On the first consideration, the markets offered up clear support. Equity indices rose globally with the European benchmark (DAX, FTSE 100, etc) leading the way. Emerging market assets, junk bonds, Treasury yields and Yen pairs all followed suit to support a backdrop of investor optimism. Yet, as wide as the swell was, its height was particularly restrained. Participation in an important measure of conviction and momentum which can be drawn from the movement of capital whether it is registered in open interest (as in futures and exchange traded products) or volume. Looking at the available figures behind most of these markets, we register the same lack of conviction that plagued us since the start of the year during more tumultuous conditions. Volatility in the meantime keeps our trading conditions particularly fluid and reactive, which lends itself more readily to fast moving risk aversion rather than speculative build up.

Focus on Trade Wars Blurs While NFPs Interest Sharpens

Instead of seeing a genuine rise in investor optimism through upgraded data or investment environment conditions, we are instead seeing an ease in overbearing threats. There are significant gains that can be produced from a market that is can reverse a strong, one-sided move. Yet, we have hardly seen the capital markets turn to an 'oversold' position on risk trends with just the past few months' volatility. In other words, there is little discount from which traders can buy the dip or long-term investors mine true value. Yet, with headlines related to trade wars and US President Trump's targeting tech companies on the equities leader board thinning out, there is enough buoyancy for benchmarks like the Dow and S&P 500 to hold up - and bounce off of - high profile support. Now, we move into the final trading day of the week and the regular gravity of the monthly US employment report. The capacity for this data to charge sentiment - whether for better or worse - is limited. Yet, leveraging volatility to force the breakdown through 2018's congestion is far more difficult to achieve than a further swing into the broad range carved out for the year. To measure risk specifically, keep tabs on the scale of the NFPs meet, beat or miss.

Dollar Staging a Technical Move That Is Hard to Trigger

Another market closely associated to the upcoming US payrolls figures and facing equally-critical technical consequences is the US Dollar. Looking first to the charts for an objective evaluation of just how remarkable the picture 'could' be, we find the DXY Dollar Index is within striking distance of its three-month range resistance, which happens to coincide with a long-term descending trendline that has ushered the market down over the past 12-18 months. More practical for the average FX trader, EUR/USD has essentially the mirrored pattern with major resistance in sight at 1.2200/2150 that stands as range support and the confluence of high-profile, long-term midpoints on historic EUR/USD ranges. Those are the more pressing levels, but they are also far more difficult to overtake. Moving back into range is far more feasible in sheer market moving terms. More difficult in translating fundamentals to price action is the disconnect of monetary policy as a key driver for the Greenback. The divergence between the DXY and implied yield from Fed Fund futures has become notoriously extreme. Under these headwinds it will be particularly difficult to rouse the Dollar to the necessary gear to secure a breakout.

A Productive CAD Rally Faces Distraction

If we are looking to further leverage the market-moving impact of the final session's economic calendar, look no further than USD/CAD. Not only will this Dollar-based major absorb the US NFPs release, but the Canadian employment report is due at the same time. This can play out in a number of combinations: the data conflicts leaving volatility but not direction; one can generate a surprise while the other is tepid; or they both come across with a shock which aligns to the same direction for the underlying pair. We should never presume an outcome from any individual event risk, but making assumptions on multiple variables like this is stacking the odds against a trader. For the Canadian Dollar itself, a remarkable rebound will be put at risk. The currency has offered up a reversal that reflects a moderation from extreme bearishness, which is in some ways more sustainable. Yet, the wrong outcome in the jobs figure, and it can disrupt productive moves like CAD/CHF's or newly formed ones such as EUR/CAD and GBP/CAD. We discuss all of this and more in today's Trading Video.

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