While foreign exchange markets are gearing up for the all important Federal Open Market Committee meeting on December 16, implied volatilities in euro-dollar show that key events prior to that may prove even more important, Bloomberg strategist Vassilis Karamanis writes.

On December 3, the European Central Bank may announce further monetary stimulus. That same day, Fed Chair Janet Yellen testifies before the Joint Economic Committee of the U.S. Congress. A day later, the next U.S. employment report is due. These events may just help the market determine the common currency's price action versus the dollar going into year-end and further out.

 

Eoin Treacy's view

These are well known public facts and therefore it is questionable how much additional impact they are likely to have on the market provided the ECB and Fed perform as expected. What is clear is that good news has already been priced into the Dollar and an even greater amount of bad news has been priced into the Euro over the last year. New news will be required to lend further impetus to these trends not least as the Euro is now testing a previous area of support. 

While both David and I believe the US Dollar’s long bear market is over, it is also true that a bull market does not unfold in a straight line. The Dollar Index has developed a short-term overbought condition and is in the region of a previous peak and the psychological 100 level. Some consolidation of recent gains is looking increasingly likely but a sustained move below 95 would be required to question medium-term Dollar dominance. 

A significant number of commodities have been trending lower in a persistent manner and some respite in the Dollar’s advance could act as a catalyst for short covering. The equal weighted Continuous Commodity Index (Old CRB) found at least short-term support today in the region of the August low and upside follow through tomorrow would enhance potential for a reversionary rally.