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EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

John Kicklighter, Chief Strategist

Talking Points:

  • The swell of volatility for EURUSD this past week between the ECB and Fed decisions couldn't evolve into trend
  • Risk trends remains the most prominent fundamental theme moving forward but monetary policy and trade wars are effective means
  • Targeted event risk can provide anticipated charge for the Euro, Pound and Kiwi Dollar; but mind the themes

See how retail traders are positioning in EUR/USD, other key Dollar pairs and global equity indices as monetary policy adds to concern already stoked by trade wars. Find speculative positioning on the DailyFX sentiment page.

Risk Trends End the Week Without Clear Commitment

If you wanted to, you could point to some impressive and troubling signals among the benchmarks for speculative sentiment. For risk appetite, the tech-heavy Nasdaq Composite closed just off its record high and the junk bond ETF extended its upswing. Presenting the opposite signal for the financial system, the China's Shanghai Composite and the EEM Emerging Market ETF both threatened broader technical breakdowns. Other measures well-suited for speculative signaling better reflected the mixed sentiment across the financial system. We don't have a commitment to revive a years-long speculative reach nor the fear necessary to sustain its unwind. Yet, the longer the deep fundamental themes continue to challenge stretched values, the more likely we come to the inevitable speculative reckoning. A general atrophy in forecasts for growth and capital circulation ultimately pressure our current course, but more pressing risks in trade wars and the return to monetary policy will more likely awaken dormant fears.

EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

ECB and Fed Stir EURUSD and Speculative Sentiment

The top event risk this past week were the monetary policy decisions from the Federal Reserve and the European Central Bank. Both managed to incite volatility from their respective currencies, but they would also charge the monetary policy theme as an underappreciated systemic theme for market-wide sentiment. The Fed's decision to hike rates and upgrade its 2018 and 2019 forecasted pace of tightening offered a modest Dollar bid, but ultimately catered to an already appreciable advantage the currency enjoyed. For short-term impact the ECB's extension of its QE program earned a more dramatic Euro response as it thwarted aggressive speculation of an eventual turn bearing. Yet, in both instances, the drive was short-lived for the FX target. For EURUSD, the pair noticeably held the line at a range low that has been in place for months and the heavily weighted DXY Dollar Index stalled at its respective resistance. The more systemic influence to arise from these two events is the contrast in global policy. The risk of the Fed far outpacing all its counterparts and test stability founded on complacency while the ECB finds itself late to the game of normalizing when the outlook grows increasingly uncertain. This quandary has not be resolved in the closing hours of this past week, so expect to see its repercussions in the Dollar and Euro as well as the capital markets over the week ahead.

EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

BoE Rate Decision and the ECB's Sintra Policy Forum

There is plenty of unresolved speculation in monetary policy from the past few weeks to carry speculation forward, but the week ahead is loaded with its own particular catalysts in this particular fundamental venue. For discrete event risk, the Swiss National Bank (SNB) rate decision will once again act as the moral lesson for what can happen when a policy authority loses credibility; but the Bank of England (BoE) meet will tap into explicit speculation. While the probability of a hike at this meeting is considered very low according to rates markets, the anticipation of a hike sometime in 2018 remains. This will put the focus on the statement that accompanies the likely decision to hold and Governor Carney's Mansion House speech scheduled later in the day Thursday. Though not as easy to judge for its hawkish/dovish impact, the ECB's monetary policy forum in Sintra scheduled for Monday through Wednesday represents an important gathering on a theme that can readily redefine the global markets and economy if poorly directed. In particular, Wednesday's panel with Fed Chair Powell, ECB President Draghi, BoJ Governor Kuroda and RBA Governor Lowe will represent a critical picture of the landscape.

EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

Event Risk for Volatility and Commodities' Week Ending Collapse

While high profile themes carry the greatest potency for establishing and sustaining trends, there is plenty of event risk better suited for short-term volatility. Such opportunities should not be overlooked as range trading is more appropriate in general until it is clear that the broader market has thrown commitment to a systemic sense of sentiment. In particular, the New Zealand Dollar deserves highlight. The 1Q current account balance is particularly important for this export-dependent economy, but it is the GDP reading for the same period that will have the final say on volatility. A reading that can alter the expected RBNZ's course would be the most effective in triggering a meaningful Kiwi move. Meanwhile, in the commodities market, Friday's plummet from crude oil and gold - two investor favorites from the asset class - will have investors from many corners of the market keeping track of intent through the opening 48 hours of trade. Crude's sharp drop after days of tepid advance seems more a swing in activity extreme rather than true conviction. That is even more likely given the focus on OPEC amid US pressure for output and news that China would raise tariffs on US energy imports. Gold's drop was even more explicit in its reflection of a rebalance in volatility. From the lowest level of activity (measured by the 20-day ATR) in 18 years to a dramatic tumble, this is a move that requires something systemic such as collective monetary policy to sustain. We discuss all of this and more in this weekend Trading Video.

EURUSD Volatility Refuses Trend, Risk Remains Uneven, Gold and Oil Drop

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

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