Single currency hemmed in by a huge volume of liquidity

In any market, traders are often seen searching for “weak spots”, levels at which a trend accelerates or reverses. These are the points at which liquidity becomes thin and any move is magnified as others either abandon positions or newcomers jump on the move.

In a “traditional” market, traders react to current and expected economic activity that will drive a Central Bank to either add to accommodation to stimulate growth or tighten monetary policy to slow an overheating economy. The currency will then react to the Central Bank’s actions or in anticipation of what the Central Bank will most likely do. It is the volume of liquidity that will determine the strength of a move once the market has determined the trend in its direction.

In the case of the single currency, liquidity has exploded to such an extent that the market now quotes prices to five decimal places. This has had the effect of dampening down liquidity to such an extent that while daily volumes of trades continue to grow, the ranges have become limited.

This factor has been the single saving grace for the euro as the market is almost in complete agreement about both the current and future prospects for the Eurozone economy.

In the short term, the economy will continue to struggle to find growth, domestic consumption is struggling, and exports are sluggish at best. For the future, several of the larger economies, Italy and France in particular, are battling growing budget deficits and are likely to break Brussels 3% upper limit.

Meanwhile, the currency remains in tight ranges with little to indicate an imminent move lower as the sheer volume of buyers at lower levels scares off speculative attacks.

Yesterday, the euro was virtually unchanged on the day, trading down to a low of 1.1297 before closing just two pips below its opening level at 1.1303.

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Greenback struggling for direction

While the market has a clear vision of the medium-term direction for the single currency, it is the direction rather than the pace of any move for the dollar that is exercising trader’s minds. That may be more luck than judgement but is evidence of the growing stature of Fed Chairman, Jerome Powell. The Central Bank’s pause in rate hikes coupled with a more data-dependent stance has stabilized the dollar with the market unsure of just how much the economy is slowing and whether the Fed’s next move will be to raise or cut.

In recent times, this is a very unusual situation which has been exacerbated by what seems to be a more localized recession in the Eurozone and uncertainties created around Brexit.

There is no doubt that the global economy is in a state of flux and as is often the case it is the dollar which is the most affected. Uncertainty leads traders, particularly the more cautious ones, into a “wait and see” approach as they await a clearer picture.

This lack of volatility leads to a more settled period for other asset classes and adds to risk appetite. With economic data continuing to point to a slowing global economy but only a shallow slowdown without a significant catalyst, the market will await Central Bank guidance before committing.

The outcome of trade talks between the U.S. and China appears to be the most likely source of that catalyst but ironically, it is the euro rather than the dollar that is likely to benefit the most from an agreement.

In the meantime, the market will be dominated by short term moves created by data releases which provide a small part of the overall picture. Today’s release of industrial production and capacity utilization data is just such an event. Unless the data is significantly out of line, the dollar’s reaction is likely to be muted.

Yesterday, the dollar index traded in a 96.97/96.79 range and has barely traded overnight as the markets focus on the market holiday at the end of the week.

No Brexit talk, no fresh ideas

As Parliament takes a break for the Easter recess, traders are left scratching their heads trying to figure out what it was they had to drive their positions before Brexit. With no fresh impetus towards Mays deal, no deal or a people’s vote, the market has taken the opportunity to take stock and is clearly content with the way it is positioned overall.

It is now generally accepted that Brexit is going to happen other than by a few die-hard remainers although even they would be reluctant to bet against the UK no longer being a member of the EU come Halloween.

The market is now being given a glimpse of the future when Brexit is no longer a “thing” although the fallout may give the market a more “genuine” feel as the currency reacts to how the economy is faring without “Big Brother” keeping an eye on things from Brussels.

It is to be hoped that MPs are using their time wisely this week, although it is more likely, especially from the Government side, that plots to oust the Prime Minister are still being hatched.

On the opposition side, the Labour Leader can reflect on a job well done. He has managed to push the country closer to a General Election without actually being seen to stymy the process other than by sticking to his guns.

The pound is side-lined as the market awaits a more definitive plan for Brexit which it appears will be some time coming. Yesterday, in keeping with other G7 currencies it traded in a narrow range versus the dollar between 1.3068 and 1.3119, closing at 1.3097.