A EUR/USD Trend Above 1.15 or Below 1.00 Rests with Systemic Themes
- EUR/USD has been trading in a general range of 1.1700 to 1.0400 for the past two years
- While there are plenty of fundamental and technical swings, conviction seems to falter before it ever gains traction
- Returning a clear course to the world's most liquid currency depends on monetary policy, risk trends or reserve status
It's easy to narrow our focus for just the purposes of evaluating and taking our next trade. Given the need to filter a sometimes overwhelming amount of information, that can often be seen as the wise approach. Yet, when you can't see the forest for the trees, the larger opportunities will remain out of reach and systemic changes in the market will leave traders confused for weeks or months. There are few places where the zoom can misdirect more than with EUR/USD - the currency market's most liquid pairing and one of the most actively traded financial instruments in the world. The ripple from a significant turn of course from this pair alone can cause spill over floods. A change to its structure can change the entire course of the financial river.
For the past two years, the FX market's most prominent member has failed to promote a clear trend. Following the dramatic fall from starting around May 2014, EUR/USD dropped over 3,500 pips in 43 weeks. After putting that low in, the pair went on to trade a fraction of that substantial slide in a range of roughly between 1.1700 and 1.0400. Not only did this lack of clear bearing frustrate but it seemed to defy standard fundamental convention. Understanding what changed in this phase can help to gain a better understanding on what the next critical trend and fundamental motivation will be. Through the tumble between 2014 and 2015, the drive was heavily centered on monetary policy. The divergent views for the ECB's late adoption of stimulus and the early vestiges of the Fed's course reversal to measured tightening offered the most distinct contrast in the global system. Since then, winds have changed multiple times. Now, we find the Fed's hawkish bearings have been well adapted. There is still a hawkish potential in the possibility of balance sheet adjustment for the FOMC before the year ends. However, that escalation of the still nascent tightening regime will compete with ECB's first possible foray into reigning in policy with a hike in 2017.
Monetary policy is one of the most active fronts for the EUR/USD over the past few years and is still clearly a leading consideration for fundamental trends today. However, it isn't the only big-picture theme to monitor. The implications of risk trends is another concern for this pair. Technically speaking, these are the two most liquid currencies in the world. Yet, they still carry different risk profiles. In extreme cases of risk aversion, there are no alternatives to the Greenback as the world's financial officials have had the importance of liquidity (and Treasuries) drilled into their heads. Yet, in the more interim phases of risk aversion, the Dollar may actually stand to lose ground against the Euro. The currency's appreciation due to its early rate hikes will inevitably come under pressure with tentative risk aversion. An even further-from-sight consideration to weigh over the long-term is the Euro's position on the FX stage. If the Brexit encourages another withdrawal - this time from the Monetary Union - it can carry deep implications for the appeal of the shared currency and its use as an reserve and international currency. We discuss the big-picture view for EUR/USD in today's Strategy Video.
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