The trading environment continues to be dominated by the increase in risk appetite reflected by the clean break of 1.33 in EUR/USD, or the current annihilation of Yen bulls. But something is changing: investors are seeing the breakdown of key market correlations, one of the most notorious being the USD index vs. Treasury yields.
So is the market environment really changing? According to the recent break lower in the RORO HSBC index, symptoms are emerging that smart money is flowing out of its shelter with more ease now, not paying as much attention to usual asset ties for the sake of capitalizing in risk-on opportunities.
With regard to QE in the U.S., there have been doubts over the past few months on how positive further easing could be at this point. Market players were speculating on a less responding dollar to further easing, when the FOMC shocked the markets with January 3rd Minutes that tipped out the possibility of QE programs ending late this year. The market still remains very much sensitive to Fed speeches in order to optimize its strategy.
In this regard, the main event at the beginning of the week in global financial markets will be Fed chairman Ben Bernanke speaking at the University of Michigan at 21GMT, NY close time.
NAB strategists expect Bernanke's comments "to be directed at disabusing his audience that stopping balance sheet expansion as a prelude to commencing to take back policy stimulus are events that could be separated "by years not months", the bank says. "If so, expect the USD to be subject to some fresh downward pressure..." NAB concludes.
According to Kathy Lien, co-founder at BKAssetManagement:
We don't think the U.S. central bank is ready to pare back purchases, especially in the first quarter and because of that, we don't expect U.S. monetary policy to pose much threat to the EUR/USD rally. Of course, a retracement after such a strong move is not unusual but overall, the EUR/USD should continue to rise.
Kathy sees near term gains capped around 1.35. Only above, "the door opens for a stronger move to 1.40" she notes.
Valeria Bednarik, chief analyst at FXstreet.com, believes that the EUR/USD is headed towards 1.3485 near term, especially after the clean break of 1.3370 hours ago, a requirement to expose Valeria's target.
What's most important, the level stands as the neckline of a weekly inverted H&S of about 1450 pips: could then the pair break and continue towards 1.50? At the time being seems an unthinkable scenario, but worth's keeping an eye on the level: if price manages this week to take over and stay above 1.3485, bulls will win a big, big battle.