If there’s one word to define this week, that’s inflation. Eurozone Final CPI, UK CPI, and New Zealand one – they all came softer than expected. Yet another sign central banks face a massive task in their pursuit of higher inflationary levels.
The other thing to watch, and, perhaps, even more important, is the ECB (European Central Bank) interest rate decision and press conference this Thursday. While no one expects the ECB to announce at this meeting, you’ll never know how the press conference will go.
Draghi and the ECB tested the markets so far with “rumors” about future ECB tapering. However, Euro couldn’t care less. It deals now above 1.15.
Lowest Volatility Ever
This summer seems to be special. The VIX (Volatility Index) shows these are the calmest markets ever. There’s a saying that when the VIX closes below 10, it’s Christmas. That is correct, because, during holidays, volatility usually dries up.
The whole summer has been like this. As such, traders faced adverse conditions, regardless their strategy. Some strategies may work in such an environment, but they’ll be tested to the limit when conditions return to normal. And, they will.
USD and U.S. Politics
Trump’s administration still offering hints about possible fiscal and tax reform to be delivered this 2017. Until then, the market reacts to the inability of the healthcare bill to get enough votes. As such, traders sold the dollar, as it happened in the previous Asian session.
However, while the dollar falls across the board, it doesn’t feel like melting. Hence, bulls are probably just around the corner.
Summer Trading at Its Best
Summer trading conditions must be correctly interpreted when buying or selling currencies. If one expects strong and aggressive moves, think twice. Typically, the market consolidates in Asia, then go for Asian highs or lows, only to reverse by the end of London or North America.
Despite this, we had some solid trends, at least on the lower time frames. AUDUSD is one of the pairs that enjoyed the biggest rally. It sits now above 0.79 and 0.8 seems to be just around the corner.
This Thursday, the focus will be on what the ECB will do. No one expects a massive announcement this time of the year, but trading is based on expectations. If Draghi hesitates or leaves room for interpretation when it comes to the faith of the quantitative easing program, the market will react strongly. My take is that the ECB will have something to deliver for both bulls and bears. We’ll find out soon enough.