DailyFX

Euro Traders Should be Wary of Heavy Volatility Potential Tomorrow

John Kicklighter

  • Dollar on the Verge of Critical Bearish Break

  • Euro Traders Should be Wary of Heavy Volatility Potential Tomorrow

  • Japanese Yen Recovery Slows, Data Mixed

  • British Pound Slides as the Unwind in Stimulus Expectations Slow

  • Canadian Dollar Charges down to 1.0100 Ahead of February GDP

  • Swiss Franc Traders Await SNB’s Figures for the First Quarter

  • Gold Moves to Mid-Point of Past Month’s Range, $1,500 Important

Dollar on the Verge of Critical Bearish Break

Fundamentally speaking, the dollar has run astray of its safe haven role – allowed to deviate thanks to a lack of clear conviction in speculators’ outlook for the markets. Yet, when a lasting fundamental discrepancy – such as the one the greenback has been running – faces a tumultuous technical setup and potent event risk, passive threats have a tendency to turn kinetic. From the Dow Jones FXCM Dollar Index (ticker = USDollar), we find a congestion pattern that has developed over the past two months. Having retreated from the mid-point (50 percent retracement) of the 2009 to 2011 bear wave near 10,600 for the second time, we now find the benchmark at the floor of the congestion pattern. The same boundaries to an extended dollar decline are perceptible amongst the major. EURUSD is hesitating once again below 1.3000, GBPUSD is slowing before its midpoint of the 2013 range at 1.5575 and USDJPY has moved away from 100.

For event risk that can reasonably be expected to generate substantial volatility for the dollar – much less revive market-wide momentum behind sentiment – we will likely be on hold until Wednesday’s Federal Open Market Committee (FOMC) meeting. The existential debate of the central bank’s QE3 program has captured the interest of the trading masses. Up until last week, the consensus seemed to be pulling the debate into a forecast for a tapering of the $85-billion-per-month program by the summer and full stop by year end. This past week, however, sentiment from the opposite extreme started to seep in. Talk of cooling commodity prices leading to deflation have led to discussion of expanding the stimulus effort. Regardless of which way the statement tips, this is going to be a concern that distracts the dollar and risk trends until it is settled. In the meantime, data like the personal income/spending data this past session and the upcoming consumer sentiment figures due in the upcoming session will hold limited sway over price action.

Euro Traders Should be Wary of Heavy Volatility Potential Tomorrow

EURUSD advanced towards 1.3100 Monday more on the strength of the euro than weakness in the greenback. And, that level of influence will almost certainly hold for the next 24 hours with key events on deck. The opening session carried two particular headlines worthy of the euro bulls’ interest. First, the Greek Parliament voted Sunday to pass an unattractive plan to dismiss 15,000 civil servants by the end of next year in a bid to win the next €2.8 billion in bailout money from the Troika. The move secures region-wide financial stability for a little longer – while tearing at the social fabric of a country that is seeing growing support of a withdrawal from the European Monetary Union. Another headline stoking speculative interests was the swearing in of new Italian Prime Minister Enrico Letta. This future of the region’s third largest economy and fiscal state has been a source of consternation since the inconclusive elections in February.

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