Talking Points:
- EUR/USD has returned to the high profile 'neckline' of the head-and-shoulders pattern it broke last week sliding below 1.1675
- Fundamental winds will pick up for the Dollar in particular this week between the FOMC, NFPs and Trump's pick for Fed Chair
- Beyond conviction in your tech and fundamental views, traders must also weigh their tolerance for risk
Futures speculators have pushed their Euro and Dollar positioning to extreme levels. See how retail FX traders are positioning for EUR/USD and EUR/JPY with short-term preference on the DailyFX Sentiment page.
Last week, the ECB's announcement that it would take its first move to moderate its expansive stimulus effort at the start of 2018 pressured another key technical milestone for the Euro and EUR/USD. Having already completed a smaller head-and-shoulders technical reversal back in September, this past Thursday's slide below 1.1675 cleared the 'neckline' on a similar but larger and more overt pattern. This is a considerable upgrade to the probability of a true reversal of the benchmark pair's 2017 trend; but in this environment, conviction does not often come from the implications of technical patterns alone. Fundamentals are critical to the re-alignment of what themes are taking the wheel and how they are oriented. So, for those looking to trade a EUR/USD pattern - or really any other pair or market that shares a similarly alluring technical view - conviction should come from a deeper source.
Fundamentally-speaking, the three-month low forced this past week was largely the work of the Euro's own slip. While the European Central Bank's decision to reduce its monthly asset purchases was a change in tack for their monetary policy regime, it fell short of the aggressive speculation that had lifted the Euro to the two-year highs it hit just last month. An extension of stimulus - even at a more restrained clip - deep into 2018 certainly didn't level up to the anticipation of rate hikes and balance sheet reduction that had been insinuated by the most hawkish speculation over the past months. Given the height of the Euro and definitiveness of the ECB's policy view, pressure to unwind could continue to weigh the moving forward. For the Dollar's part of this equation, the most productive development would be for the Fed to escalate its own hawkish policy and widen the gap to the ECB and thereby undermine the speculative reach of the past 10 months. That said, the US event risk on hand does not easily set that up.
This week is heavily steeped in US monetary policy. Monday kicked it off with the Fed's-favored inflation figure, the PCE deflator. However, that measure was lackluster at 1.3 percent, well short of the central bank's 2.0 percent target. Moving forward, the events are of even higher profile, but they don't make for an easy course for changing the fundamental course. The FOMC rate decision on Wednesday is top listing, but the market is virtually certain that no change to the benchmark will be made this week - though there is an 83 percent probability of a hike in December. That curbs the impact of this particular update. If the true interest is in rate timing and the FOMC is this week, then what will the Friday NFPs be able to do to established forecasts? The top event risk on this theme may come Thursday. President Trump is expected to decide on the next Fed Chair which can determine pace better for the central bank over the next four years than any individual meeting or event risk due in the immediate future. There are not many natural scenarios where this would look dovish and be thereby bearish for the Dollar. With that said, will this head-and-shoulders turn into a projection of a new trend or offer a failed reversal cue? We discuss this in today's Quick Takes video.
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