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EUR/USD Break Doesn’t Immediately Fuel Trend Nor Does Amazon Revive Equities

EUR/USD Break Doesn’t Immediately Fuel Trend Nor Does Amazon Revive Equities

John Kicklighter, Chief Strategist

Talking Points:

  • A critical technical breakdown for the EUR/USD last week was stingy with the follow through
  • Ahead, the FOMC rate decision and political developments along with a pullback in record long Euro positioning will factor in
  • Amazon was just the latest critical company's earnings beat that failed to stoke bullish enthusiasm for the indices and 'risk'

What do the DailyFX Analysts expect from the Euro and Dollar on a fundamental and technical basis? Find out in their 2Q forecasts.

Dollar Earns its Breakout but Markets Tentative On Trend

Among a range of impressive technical developments this past week, the most impressive in my book was from the US Dollar. Perhaps the draw is owing to the clarity of the pattern, the fact that it is arguably the most liquid asset in the world or simply because I watch it so closely. Yet, regardless of the appeal, the same need for a robust qualification is as necessary here as it has been for any other impressive chart-based break we have seen over the past months. The ICE's Dollar Index seems to have been forced by sheer force of will. The technical sparks began with trendlines, Fibs and other levels falling for USD/JPY, GBP/USD, AUD/USD and more. The true catalyst for the currency though was the EUR/USD which finally crashed through the floor of a three-month range around 1.2150. A trade-weighted index, the DXY overtook 91.15 at the same time with a confluence of various technical cues giving way at the same time. However, despite the clarity of the move and the long build up of anticipation behind it; there was no follow through to be found Friday. Where will the motivation for the currency's prolific recovery come from: interest rate expectations which are already buoyant; the easing of political risks; temperate growth? At this point, the most promising source of potential strength seems the stretched speculative positioning registered in futures or simply gains earned at the collective loss for its most liquid counterparts (Euro, Pound and Yen).

Amazon Rounds Out Strong FANG Earnings with Consistent Market Disappointment

We had one last chance to rouse the equity bulls from their stupor this past week with the Amazon earnings. The quickly rising tech titan was the final member of the popular FANG group to report its earnings for the quarter and - like its peers before it - the company's numbers were impressive. The revenue earned and growth projections offered gave every reason to be optimistic about the state of the corporate sector and the earnings to be made in this favorite investor space (shares); and yet, the market response was exactly the same as it had been for Netflix, Google and Facebook before it. Both AMZN and the Nasdaq opened Friday with an impressive gap higher, but investors spent the rest of the active trading day retracing those sudden gains. What should we take away from the fact that the leaders of the best performing sector (technology) in one of the strongest asset classes in the world (US equities) can't mark progress on objectively positive news? If speculative appetites aren't capable of recharging this wayward, nearly decade-long bull trend; what can? Calling tops on risk trends is ambitious - fool-hardy in my view - so I will stick with shorter duration trades until the path and momentum are clear.

UK GDP Leads BoE Rate Expectations to Collapse, Pound to Threaten Trend

As remarkable as the Dollar and equities lack of trend were through the final session of the trading week, they were interesting for their restraint. Top highlight from a position of volatility goes to the British Pound. The currency dropped across the board Friday leading GBP/USD to close out its heaviest two-week tumble since the Pound 'flash crash' back in October 2016. The spark for the session was the 1Q UK GDP which reported economic activity through the three-month period was reduced to a crawl (0.1 percent). Not only does that undermine the traditional value attributed to economic performance conferring value to one country over another, it bodes poorly for the Brexit negotiations and Bank of England rate expectations - two key drivers for the currency. For the ongoing divorce proceedings from the EU, it raises concern that fading sentiment is translating into tangible loss in economic output and that a sense of desperation may enter into the discussion the UK's side of the table. As for BoE rate forecasts, anticipation of another hike had played a heavy roll in the advance we have seen over the past year, but the probability of a hike in June has dropped from over 90 percent a month ago to just over 20 percent now. There is more premium for the Sterling to bleed going forward, but we will have to see if market participants recognize and respond to the fundamental disparity.

Setting Expectations for Earnings, FOMC, Eurozone Inflation and More Next Week

We have another week of important event risk and themes on the docket next week, but it is important that we don't assume the maximum possible outcome from this fundamental wave. The disappointing market response to data, the persistence of range and lack of follow through where breaks were achieved should serve as clear evidence that we are struggling for full amplitude in technical and fundamental developments. This restraint won't last forever, but false starts can chop a trader's account up before meaningful profit can help to recoup losses - much less turn to profit. Nevertheless, we should still keep track of the key milestones. On the earnings front, Amazon, the world's largest company by market cap is due to report. For the Dollar, the FOMC rate decision will be bookended by the Fed's favorite inflation indicator (the PCE deflator) and NFPs. The Euro will offer up Eurozone 1Q GDP and area inflation. A more concentrated event may be the RBA rate decision which is difficult to disappoint but can easily impress. We talk about the important upcoming events, high profile technical developments and general market conditions in this weekend Trading Video.

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