EUR/USD – Euro Afraid of Heights

• Street waits for Yellen this afternoon

• Middle-East Tensions subside

• Forex liquidity remains a premium

• Market trying to avoid lopsided trades over Q1 end

U.S dollar buyers are back with a vengeance as the street waits to close out the week once U.S Gross Domestic Data has been released this morning, and perhaps more importantly after the Fed Chair’s speech this afternoon. Ms. Yellen is due to speak about monetary policy at the Federal Reserve Bank Conference titled “The New Normal for Monetary Policy,” in San Francisco at 15:45 EST. When audience questions are expected, on rare occasions the market may get ‘unexpected’ answer.

For the time being, the dollar bull seems to be encouraged by number of factors. First, the slow grind higher in U.S front yields (U.S 1-year +7bps to +0.25%), partly due to a continued recovery in crude prices (WTI $50.25) and second, some hawkish comments from Atlanta Fed Lockhart. Even geopolitical risks are giving a helping hand to the dollar.

Tensions in the Middle East, stemming from Saudi Arabia and its allies launch of a military campaign in neighboring Yemen, seems to be easing somewhat this morning. This should subtract some of the risk premium that has been priced in over the last two trading sessions. A large percentage of the dollars strength should be attributed to the markets recalibration of geopolitical risks, allowing some risk appetite to gain traction.

Liquidity a premium

With month-end, quarter-end and Japanese financial year-end fast approaching, and the start of earnings season atop us, investors will be trying to avoid taking any lopsided positions; hence the reason for some of the dramatic intraday forex market moves.

These FX moves highlights the lack of market depth concerns expressed by both dealers and investors. Last week, the EUR managed to swing +8% in a matter of hours after the FOMC statement, and earlier this week after U.S CPI, the dollar suffered a +1% whiplash move. Even the BoE is worried about market liquidity, not specifically for forex, but capital markets. With the Fed trying to wean the market off central bank dependency, pushing investors towards data dependency, coupled with the lack of product depth to grease the ECB’s QE wheels, will only support market volatility going forward.

Even the interbank dealers have their own problems. Few are unwilling, or cannot afford, to run risk and very often currency prices become a premium. For now, this is the new “norm.” Heightened volatility certainly provides more market opportunities, but that too also that requires more patience and a very disciplined risk management approach.

EUR Rally Comes Unstuck

The only thing that the ‘tech’ market is assured of at this moment is that the EUR does not like heights. Price action above €1.1000 was unsustainable, again. The single currency’s weakness (€1.0818) from yesterday’s bull trap high at €1.1052 is currently regarded as part of an irregular flat correction. This is expected to remain the case while EUR support at €1.0775 holds.

So far this morning the market has attempted to bottom fish for the weak EUR ‘long’ stop-losses located atop and just below the psychological €1.0800 handle. A sustained market break below the support trend line (€1.0775) would alter market scenario rather quickly, exposing €1.0697 and last Sunday nights low €1.0613.

On the other hand, the EUR bull needs to recapture territory above €1.0935 to feel more comfortable. Through there €1.0970 and the psychological €1.1000 should be exposed once again.