Video: Dollar, S&P 500 and Volatility Trends
FX traders have traded through
a mine field of fundamental event risk. After the FOMC meet, Scotland
'No' vote and ECB stimulus injection; what trends prevail? Are there new
bearings or are their lasting currents that are set to retake the reins
moving forward? In this weekend Trading Video, we gauge the impact of
this past week's fundamental developments and discuss how it can shape
the currency and capital markets moving forward.
EURUSD Fundamentals (based on dailyfx article)
The Euro tumbled to fresh lows versus the high-flying US Dollar on a week of bad news for Europe and much better developments out of the US. But why might the Euro/Dollar exchange rate be at risk of an important bounce?
Almost all traditional fundamental signals point to further Euro
weakness, and yet we see clear warning signs that such news and
sentiment may be overdone. Everyone is bearish at major market bottoms
and bullish at the tops, and that in itself is an important trigger
which favors some sort of Euro bounce. Beyond that, however, we see
technical reasons why the US Dollar rally may be overdone.
High FX market volatility continued to drive the safe-haven US
currency higher across the board as the combination of a US Federal
Reserve Meeting, key European Central Bank results, and the
highly-anticipated Scotland independence referendum fueled major moves.
Yet the week ahead promises far less foreseeable event risk, and our
forward-looking DailyFX 1-Week Volatility Index has pulled back sharply.
The US Dollar’s strong correlation to volatility leaves it at risk on
such a slowdown.
It’s possible but unlikely that the Euro sees strong reactions to
upcoming European Purchasing Managers Index (PMI) survey results, a
German IFO Business Climate report, and a late-week GfK Consumer
Confidence data release. Thus we’ll focus on how US Dollar traders
react to calmer markets; we suspect that the EURUSD could bounce as
sellers lose enthusiasm.
Recent FXCM Execution Desk numbers show that total Euro trading volume
slowed even as it tumbled to fresh lows. While momentum clearly favors
further losses, the slowdown acts as clear warning that markets may
And thus we’re left with somewhat of a dilemma: on the one hand we
believe that the Euro will remain in a downtrend, but too many signs
warn of a near-term price and sentiment extreme. We advise caution on
fresh EURUSD-short positions in the days ahead.
GBPUSD Fundamentals (based on dailyfx article)
The GBP/USD fell back from a fresh weekly high of 1.6523 even as
Scotland voted to stay within the U.K., but fresh commentary coming out
of the Federal Reserve may spur a further advance in the exchange rate
should the group of central bank doves talk down interest rate
A further expansion in U.K. home loans may encourage an improved
outlook for growth, but market participants may ultimately turn a blind
eye to the minor data prints coming out of the U.K. as the Federal
Open Market Committee (FOMC) is widely expected to halt its
quantitative easing (QE) program at the October 29 meeting. The key
speeches by Fed voting-members William Dudley, Narayana Kocherlakota
Jerome Powell and Loretta Mester may play a greater role in driving the
GBP/USD next week amid growing speculation of seeing a rate hike
sooner rather than later.
Indeed, a greater emphasis to retain the zero-interest rate policy
(ZIRP) for an extended period of time may undermine the bullish
sentiment surrounding the greenback as Credit Suisse Overnight Index
Swaps show a jump in interest rate expectations, with bets of seeing at
least 50bp worth of rate hikes in the next 12-months. As a result, a
wave of dovish remarks from Fed officials may generate a more
meaningful rebound in the GBP/USD as the Bank of England (BoE) sticks
to its current course for normalizing monetary policy.
Despite the failure to hold above the 1.6500 handle, the recent series
of higher-lows in the GBP/USD certainly paints a constructive outlook
for the British Pound, and we may see the pound-dollar break out of the
downward trending channel carried over from back in July should the
group of Fed officials remain reluctant to move away from the highly
accommodative policy stance.
The gold markets initially tried to rally during the course of the week,
but as you can see the $1240 level was a bit too resistive. Ultimately,
we ended up forming a shooting star, and it appears that we are in fact
going to head down towards the $1200 level. That level should be
massively supportive, and as a result we feel that the market will test
that area. If we can get below there on a daily close, we become
extraordinarily bearish of the gold markets, as we should then head down
to the 1000 level. On the other hand, if we see some type of supportive
candle on the weekly chart, this would be an excellent area to start
going long and aiming for $1350 or so.
EUR/USD bears in full control - JPMorgan
EUR/USD bears remain in full control, shooting for 1.2769/55/46 and potentially even for 1.2502, notes Thomas Anthonj, FX Strategist at JP Morgan.Key QuotesThe
downtrend of the EUR opened additional downside before a bounce looks
to be due. Having decisively broken the potential base for a temporary
4th wave recovery at 1.2908 (wave 1 x 1.618) in EUR/USD the market
opened additional downside to the next potential base at 1.2769/55/46
(monthly trend/pivots).""A straight extension to the latter is
favored unless a break above 1.2996 (pivot) indicates that the 3rd wave
low is in place and wave 4 up to 1.3165 (minor 38.2 %) already on its
way."The latter would provide a good risk-reward to bet on the
missing 5th wave decline whereas breaks above 1.3165 and above 1.3274
(daily trend) would constitute a scale jump in favor of a broader 2nd or
b-wave rebound to 1.3413 (int. 50 %) and to 1.3701/19 (pivot/int. 76.4
%) at a later stage."
We expect the euro will fall to parity vs. the dollar by year-end 2017 (based on businessinsider article)
"The euro has weakened by 8% versus the US dollar since May," Goldman
Sachs' David Kostin wrote in a new note to clients. "We expect the
downward gravitational pull on the EURUSD will persist for the next
several years until it trades at parity versus the dollar by year-end 2017.
From a spot of 1.29, our economists forecast the euro will depreciate
by 7% vs. the dollar during the next year (to 1.20) and fall by 22% to
parity by 2017."
EURUSD Technical Analysis: Euro Aiming Below 1.28 Mark (based on dailyfx article)
The Euro slid to the lowest level in nearly 15 months against the US Dollar,
with sellers now aiming below the 1.28 figure. Near-term support is at
1.2783, the 38.2% Fibonacci expansion, with a break beneath that on a
daily closing basis exposing the 50% level at 1.2718. Alternatively,
turn above the 23.6% Fib at 1.2864 clears the way for a challenge of the
14.6% expansion at 1.2913.