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Strategy Video: Can a Euro Rally Charge a Broader Dollar Tumble?

Strategy Video: Can a Euro Rally Charge a Broader Dollar Tumble?

2016-12-06 03:37:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Crosswinds frequently prove the motivation for market runs - especially in the FX market
  • Typically, the more liquid currencies take lesser counterparts reins otherwise a constant fundamental wind is needed
  • For the EUR/USD's rally Monday, the Euro rally was certainly strong enough but its sustained hold is dubious

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

The Dollar triggered an unmistakable head-and-shoulders pattern to start off this new trading week, but falling back fully on the technical picture may lead us down a risk-fraught path. There is little picture Monday that showed the Greenback was taking its cue from EUR/USD and specifically a strong - and surprising - rally from the Euro. As far as catalysts go, that is not a misplaced motivation. However, staking a trend on a less liquid and secondary source is a stretch of assumptions. While external drivers are common in the financial system and especially in the FX market, there are reasonable limitations that our speculative appetites would be wise to account for before diving into a trade.

Typically, a market is most effectively motivated/driven by those factors that are innate - economic data from the representative economy, sales and profits for the company, yield and volatility for the underlying, etc. Secondary influences, though, are a common event. When it comes to 'crosswinds' however there is usually an order of influence that sees the more liquid player drag the lesser liquid counterpart. And the more extreme the contrast is (say the US Dollar versus the Indian Rupee) the clearer the concept. This order does not always hold. Yet, to counter the natural hierarchy of influence, a direct connection and constant momentum is needed.

For EUR/USD, the relationship is far more balanced than primary reserve currency and thin emerging market counterpart. This is a pairing of the first and second most liquid currencies in the FX market. That said, the former's influence is multiples of the latter. The Greenback does not offer up a strong counterpart to fight for influence as the focus is set on next week's FOMC rate decision. That said, the Euro may struggle to keep its prominence with a questionable foundation to its Monday rally and a distraction of its own later this week (ECB decision). When we see a secondary or peripheral driver trigger a trade setup, should we move forward or let it go by? We discuss this with EUR/USD as an active example in today's Strategy Video.

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