Russia and the FED take center stage

The lazy start of this past week has found many investors off guard to face what the last couple days had to offer: a fresh 2 year high for the EUR/USD leading to a strong dollar selloff across the board and a sudden reversal afterwards, on ECB’s Draghi jawboning concerns over an expensive EUR. Late Thursday, market talks on a final top for the EUR sounded loud, but against the general understanding, I believe is too early to call for that. 

Fundamentally, the market will have to deal with two main issues next week: the Crimean referendum, and the FED. By today, market has already priced in the fact that Russia will use Crimea’s referendum to legitimize the military occupation of the Ukrainian republic, as the ethnic Russian population is significant in the area. However, that doesn’t diminishes chances of risk rallies with Sunday opening, as the West world had already expressed its concerns over the crisis, and the US has clearly stated that they support Crimea as a part of Ukraine, and will not recognize the result of the referendum as legal. 

Both, the US and EU had menaced to impose sanctions to Russia if the country maintains its position, but so far Putin ignores them: those sanctions and any upcoming consequence on it is what may triggers runs towards safety, looking mostly for more yen gains across the board. 

When it comes to FED, market players are not expecting much change, as is pretty clear that Janet Yellen will stick to the ongoing tapering plan, and it will be no surprise to see another $10B cut. The market in fact, has already priced in such movement considering that the paced reduction in liquidity won't be enough to actually affect it. For the most, I would expect that a $10B cut won't be triggering fireworks, and if anything, Yellen speech and any tip on upcoming moves may bring some action. An unexpected scenario like no reductions in QE this month, will likely turn into a dollar selloff, as it will signal a weaker than believed economy that still needs aid. On the other hand, a reduction above $10B could give the greenback a boost across the board, but chances of any of these last happening are quite limited.

If dollar gathers momentum after the FED, remember GBP is far weaker and sensible to a greenback advance than EUR, while dollar weakness may favor an advance of the common currency to fresh year highs.