Huge Event Risk Couldn’t Break Euro - What Will?

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Huge Event Risk Couldn’t Break Euro - What Will?

Fundamental Forecast for Euro: Neutral

  • Sharply disappointing US Nonfarm Payrolls data should have broken EURUSD higher
  • ECB strikes dovish tone but doesn’t commit to further easing
  • Watch Syria headlines for next major moves in financial markets

A sharply disappointing US Nonfarm Payrolls report was supposed to be enough to send the US Dollar to fresh lows versus the Euro, but the EURUSD finished the week almost exactly where it began. What gives?

Many predicted the past week would settle two key questions and force a Euro and US Dollar breakout from recent sideways ranges. 1: Will the European Central Bank signal lower interest rates for an extended period of time? 2. Will the US Federal Reserve begin the so-called “Taper” of its Quantitative Easing policies at its September meeting?

On the first point markets were somewhat disappointed; the ECB struck a dovish tone but fell short of calling for further easing or more direct forward guidance. Debate over the Fed’s next moves were arguably settled as a sharp disappointment in key US Nonfarm Payrolls data sunk bets on a sharp shift in the US central bank’s monetary policy.

Yet the post-NFP US Dollar sell-off wasn’t enough to take the Euro clear of month-to-date highs, and forex traders continue to play an uneasy waiting game for the next major catalyst to break the US Dollar out of its sideways chop.

A relatively empty economic calendar ahead suggests that the coming week will be a quiet one. Yet we would be remiss to ignore the obvious tail risk in the potential for much larger international armed conflict in Syria.

On one side is the United States in favor of military intervention, and on the other is Russia which remains staunchly opposed to any such actions. The stakes seem clear: a simple headline from Russia’s Prime Minister was enough to send the S&P 500 almost 20 big points lower within minutes.

We won’t advocate trading on any such headlines, and indeed that sharp S&P sell-off was later retraced. Yet it seems foolish to ignore the risk of outsized market moves. The US legislature is expected to vote in favor of armed US intervention in Syria next week, and any surprises would likely bring big market volatility.

It has been frustrating to trade the Euro as it sticks to a choppy range, and we feel it’s time for the Euro to tell us where it’s headed. The fact that it continues to hold below its month-to-date high leaves us somewhat bearish, but we’ll need to see acceleration below its 200-day Simple Moving Average near $1.3150 to have any real confidence in a bearish forecast.

In the meantime, we’ll brace ourselves for more choppy EURUSD price action.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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