FX: A Surge In Volatility Is Possible

 | Nov 20, 2018 08:08AM ET

The main idea of the overviews from the previous period was the assumption about the probability of the end of the multi-month US dollar’s strengthening. Both fundamental and technical arguments were mentioned. At the same time, for a more correct conclusion, the possibility of a short-term period of strengthening the dollar was assumed, which is necessary to update extreme annual values in currency pairs with its presence. Firstly, the Brexit negotiation process contributes to the strengthening of the dollar toward European currencies. Today a vote of no confidence in Prime Minister Theresa May can be put to a vote. If approved, strong volatility will be observed in world currency markets, which, first of all, will be reflected in a sharp weakening of the British currency. Secondly, the extension of the transition period, during which Britain will continue to finance EU projects, to pay a membership fee, but will be deprived of the right to participate in decision-making, is a red rag for British parliamentarians, which undermines their national pride. Under these conditions, the probability of passing the draft Agreement through the British Parliament is close to zero, which leads to a "hard" option for the UK to exit without an Agreement. However, from my point of view, the Brexit factor is a short-term one, because the clarity on this issue should come by the end of November. At the same time, at the end of last week, in the speeches of a number of representatives of the Federal Reserve began to appear notes of doubt about the need to maintain the previous pace of tightening monetary policy. Richard Clarida, the new Fed Vice Chairman, pointed to a slowdown in global economic growth and expressed the opinion that the interest rate after three years of its increase by the Fed is close to the “neutral” level. At the same time, the President of the Federal Reserve Bank of Philadelphia, Patrick Harker, said that he was not ready to support another rate rise in December, considering restrained prediction for inflation. These statements, after the expected rate rise in December, indicate the possibility that the US regulator in early 2019 will take a pause in its actions, which will be a negative factor for the dollar.


In today's overview, charts for some currency pairs are presented on smaller time frames. From a technical point of view, is observed the formation of local signals of strengthening the US currency.


The main event on Tuesday will be the speech of the head of the Bank of England Mark Carney and the regulator's report on inflation. The main thing in his speech is to assess the dynamics of the national economy, the prospects for further monetary policy and possible actions of the regulator in the case of "hard" Brexit.

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EUR/USD

Following the results of trading on Monday, the hourly chart of the EUR/USD pair formed a divergence between the highs of prices and the values of the RSI and MACD indicators. Based on this, it is predicted a gradual decrease in quotations to the support zone located near the 1.1400 mark. The upper limit of the medium-term channel, in which the pair has been trading since may this year, is just below this level. At the same time, the reaction of the markets to the speech of the head of the British regulator Mark Carney will be important for the pair today.
The support zone today is in the area of 1.1390-1.1405.
The resistance zone is in the range of 1.1450-1.1460.