Talking Points:
- Light US economic calendar today puts focus on Fed speakers.
- EUR/USD remains highly vulnerable if Fed rate expectations rise.
- Higher volatility in FX markets should have implications for your trading strategies.
The US Dollar has gained against three of the four components of the USDOLLAR Index today. In particular, after the latest swath of Euro-Zone PMI figures for May ultimately disappointed expectations, EUR/USD remains fertile ground for the US Dollar to exhibit its strength. Net-shourt EUR/USD positioning in the futures market remains near its lowest level in two years, leaving ample room for markets to push the pair lower again (if they so choose).
Similarly, the US Dollar is gaining against the Australian Dollar and British Pound this morning, and for the time being, both of these currencies are the de facto high beta currencies in the USDOLLAR Index. For the time being, AUD/USD is carrying an albatross around its neck: Chinese officials recently expressed their confidence in the economy's "L-shaped" growth, playing down the likelihood of further stimulus this year. For GBP/USD, with the 'Brexit' vote a month away to the day, more violent, non-committal price action is to be expected - we fully expect commentary and the headlines to increase dramatically between now and the referendum vote.
Unfortunately for risk assets, USD/JPY's lack of participation is foreboding. As we outlined on Friday, USD/JPY remaining elevated is one of the three keys to the USDOLLAR Index having a viable breakout. If USD/JPY is unable to sustain its gains, then it probably means that equity markets around the world are falling, which reduces the odds of the Fed pulling back liquidity in the near-term. Without rising rate expectations, the US Dollar loses its main catalyst for its rally since the beginning of May (that, and twenty year seasonality patterns were extremely favorable for the US Dollar).
See the above video for technical considerations in EUR/USD, USD/JPY, the USDOLLAR Index, Gold (CFD: XAUUSD), and Crude Oil (CFD: USOIL).
Read more: Don't Be Surprised if You See More of the Same from the Euro
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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