Event Risk Trumps Forex Fundamentals

The euro gained on the U.S. dollar and the yen held steady in a thinned-holiday Asian trading session overnight. But as tensions rise between Russia and the West, and the violence in the Gaza Strip becomes increasingly bloody, geopolitical events remain the focal point for investors and all asset classes.

The corporate earnings season is underway but even favorable U.S. earnings have been seemingly forgotten. Likewise, the aggressive search for safe-haven trading strategies has temporarily fallen since the initial shocks of late last week. Markets and investors are seeking clear guidance from authorities before pursuing any aggressive strategies.

Asian bourses managed to edge higher overnight thanks to the generally upbeat flow of U.S. corporate earnings reports and ahead of a host of results due this week. Expect Europe to report nothing different as they wait for markets stateside to open.

The sharp swings and the uptick in intraday volatility are certainly a stern reminder to investors to remain fleet of foot and not ‘marry any particular position’ when volumes remain an issue, especially after weeks of calm. The harsh reality is that during the first half of this year, geopolitical events have had a relatively short lifespan and investors seem to need more assurance before the next move. While the conflict in Gaza has sent the price of oil higher on concerns of production risks in the Middle East, gold is having trouble recapturing its risk aversion high print of late last week ($1,326). Participation and a lack of market interest are finding it difficult to push various asset prices in either direction.

Technical Breakouts on Pause

As we head stateside, currency technical levels remain in focus following last Friday’s tests for the EUR and GBP both outright and on the crosses. There has been no sustained breakout just yet, especially for the 18-member single unit, which tested and slightly breached the lower end of the trading range at the €1.3500 level at the end of last week. For many, with the pair having managed to hold above the pivotal January low of €1.3477, it will allow for more consolidation before the next onslaught with purpose.

Ongoing geopolitical events should leave the EUR vulnerable; especially ahead of a European Union foreign ministers meet scheduled for tomorrow to discuss sanctions against Russia. Market participants are required to follow both the Treasury and bund yields for clues. Currently, yield differentials are also hinting that the EUR could come under renewed fresh pressure with German 10-year yields probing fresh, historically low levels (bund 10’s +1.16%, U.S. 10’s +2.28%).

RBNZ Could Surprise

The dollar majors are relatively flat from Friday’s closing levels, but one or two have tried to make an exception. On the fundamental front this week, it is a relatively light calendar internationally — markets will be taking most of their trading cues from breaking news items. However, investors will want to watch to see if the Reserve Bank of New Zealand (RBNZ) increases its key interest rate for a third time this year on Wednesday. The Kiwi (NZD$0.8700) was one of the exception currencies in the overnight session that tried to trade through some key psychological resistance levels.

Outside of second-tier economic data, the market will be expected to adjust positioning going into the RBNZ rate decision as they do all central bank rate announcements. The futures market is pricing in a +75% chance that RBNZ Governor Graeme Wheeler will raise interest rates to +3.5% — if the bank decides to pause until at least December, there will be a ‘few’ investors wanting to unwind their long NZD/USD positions.

In Japan, investors will look to the June merchandise trade and consumer prices to gauge the impact of the country’s April’s sales tax increase. Has Prime Minister Shinzo Abe got it correct? Elsewhere, the July flash purchasing managers’ indexes for China, Japan, the eurozone, Germany, France and U.S. will also be interpreted. However, expect event risk to trump all others.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.