All Wound Up And Waiting For A Catalyst
The currency market is getting wound up and that is a great thing for traders. The amount of confusion in the market driven by trade war, slowing economic indicators, Brexit, and uncertain central bank policy has weak hands chasing news trying to get on the right side of the market. What this means for traders today is that valuations for major currency pairs like the EUR/USD, GBP/USD, and USD/JPY are in no-man’s land, caught between rising levels of bullish and bearish sentiment. With each new headline, as each day passes, the pressure within each market builds. When it bursts traders can expect to see some big moves.
The EUR/USD – Lagarde Takes Over
Christine Lagarde took the reins of the ECB this week. She did not comments on fiscal policy in her first official speech as ECB President but she did comment on the “new world order” and its impact on the EU. She says the EU’s economy faces threats from both a slowdown in global trade related to trade wars and protectionist policies as well as from changes in technology. She wants the EU to be open to foreign trade but encouraged leaders to work harder at creating sustainable economic growth through domestic channels. She also says the bank stands ready to support the economy as needed. In light of today’s weak Eurozone PMI and the ECB’s already dovish stance sound like she’s ready to cut rates and/or fiscally stimulate the economy in some other way, moves that are sure to send the EUR crashing versus the dollar.
The EUR/USD is now sitting smack in the middle of its near-term trading range. The pair has confirmed support and resistance at the extremes of this range and the indicators, well the indicators suggest sideways movement will continue. The risk now is in the data. A raft of data is due out from the U.S. next week and virtually any single piece could this pair moving. On the U.S. front, due to the Thanksgiving holiday, 8 major releases are coming on Wednesday including a GDP revision and key, core consumer-level inflation. Hot reads, even just steady OK reads, on this data is guaranteed to send this pair lower.
The GBP/USD – Brexit Uncertainty And Weak Data
The GBP/USD got a lift last month when Boris Johnson secured his snap-election. The snap-election is expected to cement the Conservative Party’s majority in Parliament and that in turn will guarantee a smooth Brexit early next year. The problem for the pair now is that weak and weakening UK data (both manufacturing and services PMI show contraction) are dragging the pound lower. The GBP/USD have confirmed resistance at the 1.300 level and now indicated lower. Strong data from the U.S. next week will likely keep this pair under pressure. A move below the short-term moving average would be bearish. Such a move would confirm reversal in the pair and likely take it down to 1.2600 in the very near term.