20 pips
Despite significant macro events, FX volatility has taken a nose-dive in recent sessions. For EURUSD, the most heavily traded and directionally influential pair in the market, a range of just 20 pips prevailed through the European and into the US session. This is a currency pair that amongst many other factors yesterday was digesting the outcome of the French election, the potential for a Democratic candidate change in the US election rate, as well as the ongoing congressional testimony of Fed Chair Jay Powell. Even with those heavy weight events, the pair barely budged an inch. Is this a calm before the storm, a quietism, or just the new short run norm?
There is a good chance that the CPI release due today is the element the market has been waiting for. Aside from this, the lack of FX volatility could be seen as an endorsement of the carry trade once again. This would feed into the view of a slightly over valued EURUSD that would likely correct lower gradually. As electoral expectations in the US continue to shift towards the re-election of a pro-growth (albeit at any cost) Trump-led Republican win, the Dollar could continue to attract a bid. Add to the mix a likely gridlocked parliament in France as well as the numerous heavy-hitting Eurozone members on the excessive deficit reduction plan and you’ve got a recipe for fiscal-led structural EURUSD decline.
There still remain significant risks to market stability. However, none greater than those that have been comfortably accommodated within ever tighter ranges in recent weeks. The bias towards a rotation out of long EUR positions and a search for strong FX fundamentals could become derailed of course. Notable peripheral risks include stresses in the US housing market, the propensity for a further rout in the French bond market, the ECB decision next week and updates on the US labour market.
Discussion and Analysis by Charles Porter
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