Slowly but surely, the Forex market nears important fundamental events. It all starts with this week’s ECB (European Central Bank) meeting on Thursday.
Expectations were that the central bank will make it clear how it will unwind the quantitative easing program. As always, the market didn’t have the patience to wait. It sent the Euro higher across the board.
The EURUSD broke above 1.20. Even if the move was short-lived, the recent price action still holds some bullishness in it.
The ECB didn’t like the Euro ascent. It tried some “trial balloons”, at least when it comes to verbal interventions. It raised concerns about the recent currency strength derailing the QE exit.
Yet, it all comes down to Draghi this Thursday. The Eurozone economies enjoy one of the strong recoveries ever. As such, the bank can’t ignore it much longer. One way or the other, tightening in Eurozone will come.
How About the U.S. Dollar?
The dollar trades in? a dangerous territory. It is caught between geopolitics (safe-haven status), risk-on and Fed’s tightening plans.
The recent levels make no sense. In fact, with the exception of the EURUSD, the major pairs consolidated.
The USDJPY trades in a consolidation since Mr. Trump’s election, USDCHF can’t break above parity but doesn’t quite collapses, and GBPUSD still looks for direction after Brexit.
The market needs a reason for the new dollar trend. Regular NFP or other economic data is not enough anymore.
We might just have some of those much-needed reasons coming soon. The debt limit negotiations in Washington might be one of them.
Typically, after the limit gets raised, the dollar takes off.
And then there’s the U.S. Treasury. It builds a half a trillion USD buffer. Or, at least so it states.
While doing it, it drains liquidity from the market. As such, it adds to the tightening cycle the Fed is already in.
If you add to this the quantitative tightening plans the Fed has, you’ll have a full dollar swing mode coming up.
It may have been that we had a dull summer on most of the currency pairs, but the lull is about to be over. Make sure you understand the drivers behind this market and prepare for a jump in the volatility index.