Market Update – May 23, 2017

Market Update – May 23, 2017

Now that we are in the second half of May, we can say traders can brace for summer trading. This is a lull period with little or no volatility. Typically, the summer months show ranges on the Forex dashboard. This year may be different, though.

 

The ECB (European Central Bank) and the Federal Reserve of the United States look to set the interest rate in June. The ECB is the first central bank to do that, so the focus is on the common currency.

 

At least when it comes to the EURUSD pair, this one is on fire lately. Starting with the relief rally after Macron’s election as the next French President, the EURUSD squeezed shorts like never in the last couple of years. Judging by the strength of the move, the rally should have more legs.

 

1.13 is just around the corner and bulls almost tripped the stops above Trump’s election in last November. They tried with the last round of positive economic news out of Europe: PMI’s in France and Germany are at multi-years highs, while IFO Business Climate in Germany enjoys levels not seen in the last two and a half decades. The pressure is now on the ECB to change the language for its monetary policy decision.

 

The problem for the ECB is that it cannot ignore these positive signs. Yet, inflation is not picking up. Even the GDP (Gross Domestic Product) will likely be peaked this quarter. Oil is not helping either. As a major driver for inflation levels, oil looks this week at the OPEC (Organization of Petroleum Exporting Countries) for direction. From this point of view, Thursday’s meeting outcome is important for all central banks in the world.

 

The Fed, on the other hand, looks at a strong labor market and the pressure to hike rates still exist. If the ECB will be more hawkish than expected, look for the Fed to hike rates. This will give a bit of maneuvering tone for the European Central Bank to make room for some language accommodation in its statement.

 

The FOMC Minutes this Wednesday will make the U.S. Dollar move. However, keep in mind the minutes lag the actual decision by three weeks. It means they refer to something that happened in the past and most of the times the info is already priced in the market. Nevertheless, the dollar might react on nothing at all.

 

All in all, expect the rest of the week to be dominated by Euro flows as the market already prepares for some shifts in monetary policy.

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