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Pressure Builds for EUR/USD with the ECB and US GDP Next Week

Pressure Builds for EUR/USD with the ECB and US GDP Next Week

John Kicklighter, Chief Strategist

Talking Points:

  • Conviction never solidified for the S&P 500-led equity breakout this past week, but even measured technical progress fell apart
  • Market conditions are growing more fluid while possible catalysts grow more numerous - I'm focusing on political risks
  • Top event risk in the week ahead includes: ECB and BoJ rate decisions, US and UK GDP, US sentiment surveys and more 'FANG' earnings

See how retail traders are positioning in all the Dollar-based majors, indices and US Oil on an intraday basis using the DailyFX speculative positioning data on the sentiment page.

At certain points this past week, it seemed like speculative interests would regain control over the markets. From the S&P 500, we were given a picture first of key technical progress. After weeks of consolidation at important support - a trendline stretching back to the election for the US index - we finally registered an undisputable, positive drive with a traditional fundamental lever in earnings (Netflix). Yet, after that technical break, sentiment immediately started to break down. The effort could have still proven productive for bulls had they used the initial jump off point as a new temporary floor to carry us the next leg higher at a later date. Instead, that former-resistance-as-new-support opportunity fell apart through Friday. Not all of the various risk-sensitive assets suffered the same short-term fate as US equities. UK shares actually progressed, emerging market assets were steady throughout and the 10-year Treasury Yield hit a new multi-year high. However, the inconsistency in correlation itself is a sign that conviction is absent. For investors and traders, this should be viewed as a market that is still extremely flexible that is more capable of turning to a lasting bear trend than at any other time in years. Be cautious. Favor shorter duration and more reasonable trades.

The Dollar is Indicative of Pressure

While the underlying risks in speculative complacency and positioning are extraordinary across the financial system, there is at least some degree of pressure relief in the burst of volatility through the first quarter of the year. Of course, that moderation was nowhere in sight for the FX markets. The Dollar and EUR/USD (benchmark currency and cross) notably carved out a remarkably narrow range through 2018's open. And, it isn't that the currency market is immune to the threats that sent capital assets reeling. Rather, it was confusion and cross winds that turned much of the liquid FX market into 'a deer in the headlights'. The pressure will not likely simply abate as the uneasy balance keeps exchange rates balanced. There will be a reckoning for this corner of the financial system as well - particularly through the fundamental themes that are so active now: political risk and change monetary policy tides. At the forefront of this development will be the Greenback. Three-plus months of range will likely come to a close soon, but seeking exact timing is gambling rather than probabilistic trading. Keep tabs on critical technical levels - like 1.2150 and 1.2600 for EUR/USD - and monitor fundamental developments for cues that catalysts can set rebalancing in motion. In particular, I believe any serious recovery effort mounted by the Dollar (bullish) would be particularly productive.

Central Bank Decisions and GDP Updates

Looking out over coming week for the top event risk and themes, there is quite a bit that can at a minimum generate volatility - and if striking the right nerve, can finally trigger trend. On the monetary policy front, the two most dovish central banks among the major players are due to give updates. The Bank of Japan's weigh in will be considered the lesser event because there is little nuance. That said, a reminder: if the BoJ were to signal a path towards normalization, it would redefine the view of global monetary policy and fast track a convergence between tepid underlying value and over-indulgent speculative pricing. The ECB will register more activity through its shades of grey. Friday, ECB President Draghi opined that the Eurozone growth cycle may have peaked and asset prices warranted concern - all amid unconfirmed reports that the group is considering pushing back its confirmation of normalization. If I didn't know any better, I'd say this central banker was attempting to warn or talk his currency lower. The more black-and-white event risk is through the UK and US GDP readings. These are critically important measures for the questionable view of optimism in growth and market performance, but have a tendency to be non-movers. If there is a surprise though - particularly on a Friday - it could up-end an undeserved calm.

Outside of the scheduled event risk, it is very important to account for market conditions and more dynamic themes. In the pantheon on fundamental influences currently competing for our attention, the greatest risk in my book is political risk. This is a naturally vague topic with an extraordinarily wide array of possible outcomes and influence over the markets. Unstable domestic policies and fragile trade policies continue to fracture our need for 'stability' to maintain highs. In particular, keep tabs on US President Donald Trump given his propensity to announce substantial policy change with little warning. And while there is so much potential for such dramatic change, we should not commit to a trend from this unsteady range-based environment. It is better to remain flexible with short-term intentions. To that point, keeping tabs on critical trend developments from the likes of the Dollar, Euro and Pound is important. However, trading more timely and measured moves from the likes of the Australian and New Zealand Dollars fits this interim transition period we presently find ourselves in. We discuss market conditions, event risk and potential in this weekend Trading Video.

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