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EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

John Kicklighter, Chief Strategist

EURUSD, GBPUSD and USDCAD Talking Points:

  • Risk trends are starting to downshift activity levels as if they are heading directly into another holiday period – something contrarians should watch closely
  • Anticipation is the name of the game for the both USDCAD and EURUSD as both pairs stand close guard to 50% Fib of historical ranges and rate decisions near
  • If you’re looking for a key break and/or trend from GBPUSD or Sterling crosses, you may need to wait until UK and EU officials settle trade terms – what dates should we watch?

Risk Trends Grind to a Virtual Halt – Beware a Break

Historically, December is known as a month of material risk appetite. After April and November, this is the month that traditional represents the best performance for the benchmark S&P 500. That would seem an easy expectation to fulfill at present with the benchmark US index and its peers pushing record highs, but those assumptions would lead to considerable surprise. Keeping the focus on the SPX, activity levels continue to grind to a virtual halt with the 20-day average true range (a measure of realized volatility) sliding to lows more associated to seasonal lulls while short-term trading ranges (5-day in the below chart) suggest activity levels more akin to activity commensurate to actual holiday trade. We are still some weeks out from a true liquidity drain and there is plenty of fundamental uncertainty for which we must account. I will treat this situation a contrarian to quiet and at the very least keep vigilance on activity levels.

Learn more about equities, how to analyze the and their role in the big picture for global markets in our Education section.

Chart of S&P with 5-Day ATR and 20-Day Historical Range (Daily)

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Chart Created on Tradingview Platform

In looking for fundamental resolution (or an outright catalyst) for a systemic shift in speculative appetite, it is important to keep tabs on the most universal of sparks. As it stands now, the tributaries for growth forecasts are worth watching closely. On the one hand, we have the building pressure of a resurgence in coronavirus cases around the world. Appetite for lockdown has been far more reserved this time around that previously with the US leading the swell in cases and deaths. This poses a serious concern for the compounding fallout for the economy (not to mention the human toll) and increase the anticipation of a vaccine. The distribution of inoculation is a promise for those defaulting to optimism further long the horizon, but near term consequences are hard to ignore. For those concerned over near-term pressures, the stop gap is stimulus. That being the case, news this past session that US Treasury Secretary Steve Mnuchin brought a $918 billion stimulus program to the House Speaker warmed expectations. Yet, that enthusiasm was later dashed when it became apparent that the a one-time $600 stimulus check would come at the expense of a dramatic decline in unemployment benefits. This does not bode well for a deal.

Chart of Major Central Bank Stimulus (Monthly)

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Chart Created by John Kicklighter

Anticipation for Rate Decision Pairs to Historical Technical Levels

Looking ahead to Wednesday’s trading session there are a few high profile events and even multiple central bank updates on tap. I will certainly take stock of the Bank of England’s financial stability report, but the focus remains on critical deadlines for trade discussions. Meanwhile, the Brazilian central bank is expected to hold its benchmark rate at 2.00 percent to add to its relative carry trade position. Despite the slide from USDBRL, this too draws less of my attention. My focus will be on the Bank of Canada (BOC) rate decision. The central bank is expected to hold its benchmark rate unchanged at the basement level of 0.25 percent while the its stimulus program is likely to hold course at approximately C$4 billion in bond purchases per week. However, the progress of USDCAD pulling the pair towards its historical range midpoint could rouse the group to threaten action if it sees risk to trade-related growth.

Learn how central banks influence the currency markets in our DailyFX education series.

Chart of the USDCAD (Monthly)

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Chart Created on Tradingview Platform

Adding another dimension to USDCAD for me is that the situation is very similar to what we are seeing in EURUSD. The benchmark currency pair has stalled in its progressive climb at the midpoint of its own historical range around 1.2150. That said, this group is expected to bolster its efforts to head off further trouble. Multiple European countries have resorted to temporary shutdowns to curb the resurgence of coronavirus cases which is a distinct economic constraint. In the meantime, the EU is still struggling to unlock a massive fiscal stimulus through its forthcoming budget as Poland and Hungary block its necessary unanimous approval. The region seems to need this stimulus and it may need to impress.

Chart of the EURUSD with 100 day Moving Average and 5-Day ATR (Daily)

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Chart Created on Tradingview Platform

British Pound Faces Days of High Volatility and Anticipation

Speaking of anticipation, the Pound still tops my list for potential volatility and an undefined timeline to establish that relief. Unlike the ECB rate decision which has a clear date, there is no definitive timeframe for trade conditions to be confirmed between the United Kingdom and the European Union. We learned this past session, that Prime Minister Boris Johnson would be heading to Brussels to meet with his European counterparts in person in a bid to clarify trade relations come January 1st, 2021. It was suggested that even if a clear deal wasn’t struck this week – which many believe is essential to pass the necessary measures before the year closes – they would continue to talk in the new year. Something to consider, continued discord is more likely to be rolled forward with language while a break through would be stated explicitly as such. The latter scenario remains less likely; but if there is a clear volatility spark, it would seem to take that form.

Chart of the GBPUSD with 100 and 200-day Moving Averages and Daily Wicks (Daily)

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Chart Created on Tradingview Platform

If we move through Wednesday’s session without satisfaction on a trade course – it will likely be a late night for GBPUSD watchers – the European Commission two day meeting over Thursday and Friday will be a next stage of vigilant watch for FX traders. It is worth considering for scenario analysis what could happen to the cable if we see a definitive ‘no deal’ outcome for Sterling pairs. My poll (for GBPUSD specifically) suggests traders expect a significant tumble could be in store. I am of the mind that this is perhaps more heavily discounted than many are accounting for. Meanwhile, developments such as the UK Trade Minister’s remarks that it would suspend retaliatory tariffs on the US for the Airbus-Boeing stand off suggest the country is attempting to make friends with the world’s largest economy in preparation of being outside of Europe’s legal and political influence.

Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown

EURUSD, GBPUSD and USDCAD Prone to Volatility and Anticipation

Poll from, @JohnKicklighter


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