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Dollar and Equities Slip after Fed Hikes, Now It’s the ECB’s Turn

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Talking Points:

  • Heavy speculation long ago priced in the Dollar’s yield advantage, which undercut the response to the Fed’s hike Wednesday
  • Where USD carry gained little traction, the Fed’s acceleration adds greater pressure on over-extended risk appetite
  • The ECB is facing a policy decision more akin to the Fed’s 2014 shift, but it too may connect more readily to risk trends

See how retail traders are positioning in EUR/USD, other key Dollar pairs and global equity indices as monetary policy adds to concern already stoked by trade wars. Find speculative positioning on the DailyFX sentiment page.

A Fed Rate Hike and Upgraded Forecasts Shakes the Wrong Market Pillar

The Federal Reserve triggered a speculative response from the markets this past session, but it wasn’t exactly the reaction from the Dollar and risk assets that most had anticipated. And, that is perhaps a sign of where the speculative tide is rising. Accounting for the US central bank’s event Wednesday, the top line outcome was a 25 basis point hike to the target range bringing it to 1.75 to 2.00 percent. That was fully expected and thereby fully discounted by the broader market. That said, the greater nuance from the ‘quarterly’ events didn’t disappoint. In the Summary of Economic Projections (SEP), the group modestly improved its forecasts for growth, inflation and employment. The figure that traders were looking at however was the outlook for interest rates. There, the median rate forecast rose by 25 basis points to 2.325 percent – or four full 25 basis point hikes through 2018. That is an unmistakable upgrade from the March assessment of three hikes. Yet, as hawkish as the headlines were from this event, the details offered reason for restraint. Though the forecast is now officially four full rate hikes versus three, the actual change from those members voting was slight – really a technicality or rounding error. What’s more, where the Fed is leveraging an advantage for the Dollar, we see the market increasingly unsettled in its pursuit of risk trends and favoring short-term capital gains rather than long-term income.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

Why a Fed Upgrade Earned the Dollar Limited Traction but Raises Capital Market Risk

For those that have been trading FX or following interest rates for their investments over the past few years, it is no surprise that the Federal Reserve is the most hawkish major central bank – by a wide margin. The US central bank began tightening its monetary policy (actual rate hikes) back in December 2015 and has more or less maintained a gradual pace of tightening since. This put US policy in distinct contrast to all of its largest peers. In fact, in 2017, the Fed put in for three rate hikes when most of its global counterparts maintained or expanded accommodative monetary policy. And yet, the Greenback steadily lost ground through the year. Why is that? First the markets are forward looking. When the Fed moved to taper, it signaled their intention to start down a path or normalization that would contrast to the ECB, BoJ, BoE and others. This earned the Dollar remarkable gains starting in 2014, well before its first rate hike. This highlights another unique aspect of the market: there was greater appetite for capital gains versus ‘income’ (dividend, carry, yield, etc). In other words, the market valued the undervalued perspective where the start of rate hikes would start the flow of capital into the US, but there was little actual interest in holding long-term exposure to collect a 1.00 or even 2.00 percent annual carry. Slightly increasing the yield advantage doesn’t overcome the serious limitation that yields globally are extremely low such that the risk-reward of long-term buy-and-hold is unprecedented in how unattractive it is. Add to that the implications of tighter monetary policy calling into question how far the markets have reached based on the low volatility and low yield supporting years of speculative stretch, and we undermine the whole reason the Dollar advanced in the first place.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

The ECB Decision Is More Tuned to Speculation, A Greater Threat to Risk Trends

Ahead, the top event risk is the European Central Bank rate decision. Of the three major central bank rate decision this week, the ECB’s arguably represents the bigger event for its own currency and can leverage a greater sway over speculative trends than the Fed’s actual move to tighten. It may seem counterintuitive at first blush that a high probability hold in policy can lead to greater market response than a realized hike; but when we consider the market’s penchant for looking ahead and the influence of changing tides for broad risk trends, the potential for the European authority is easier to understand. Through the remarks of key ECB officials over the past few weeks, anticipation for a definitive taper has hit reached levels of virtual certainty across the speculative rank. Of course, this expectation creates the same skew that the Fed faced whereby it is easier to disappoint than impress; but the impact of meeting or exceeding forecasts can more readily translate into market movement. The current situation for the Euro is similar to what the Dollar experienced in 2014. That said, 2017’s remarkable rally likely signals the speculative anticipation has already found its way into the currency’s pricing. Furthermore, if this well-known dove starts its long climb out of extreme accommodation, it can more definitively shift global monetary policy towards a hawkish bearing and definitively disrupts the monetary policy – speculation connection.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

Keeping Tabs on ‘Other’ Themes

Between the Fed and ECB policy changes, it is easy to have our attention pulled into the influence of developed market monetary policy. However, we should also consider the other high profile events and themes that are set to define our course forward. For themes, trade wars has been conveniently shoved to the backdrop but it remains very much in flux and represents a prominent risk to risk exposure moving forward. As for event risk, the Pound has itself been remarkably active for headline fodder – it just so happens, there are offsetting fundamental winds to keep the Sterling from establishing a clear range. This past session, the run of May inflation data was headlined by a 2.4 percent headline CPI and 2.1 percent core figure which puts little pressure on the BoE to accelerate or abandon its early monetary policy shift. Meanwhile, the crunch votes in Parliament have rendered support for Prime Minister May’s government with votes against requirement to stay in the single market and the PM to return to negotiation without a Brexit agreement. This not particularly encouraging for the outlook in the UK, but it does narrow the possible outcomes and thereby reduce ‘risk’. We discuss all of this and more in today’s Trading Video.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

If you want to download my Manic-Crisis calendar, you can find the updated file here.



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Forex

Slowing New Zealand GDP to Rattle Post-Fed NZD/USD Rally

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Trading the News: New Zealand Gross Domestic Product (GDP)

Updates to New Zealand’s Gross Domestic Product (GDP) report may rattle the NZD/USD rally following the Federal Reserve meeting as the growth rate is expected to narrow to 2.5% from 2.6% per annum in the third-quarter of 2018.

Image of DailyFX economic calendar

Another downtick in the GDP print may produce headwinds for the New Zealand dollar as it warns of a slowing economy, and a dismal development may push the Reserve Bank of New Zealand (RBNZ) to alter the forward-guidance as the central bank warns ‘trading-partner growth is expected to further moderate in 2019.’

Even though the official cash rate (OCR) sits at the record-low of 1.75%, the weakening outlook for economic activity may encourage the RBNZ to further insulate the economy as the central bank asserts that ‘the direction of our next OCR move could be up or down.’ In turn, a GDP print of 2.5% or lower may spark a bearish reaction in NZD/USD, but a positive development may fuel the advance following the Federal Reserve meeting as it curbs bets for an RBNZ rate-cut. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Impact that the New Zealand GDP report has had on NZD/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

3Q

2018

12/19/2018 21:45:00 GMT

2.8%

2.6%

-10

-15

3Q 2018New Zealand Gross Domestic Product (GDP)

NZD/USD 15-Minute Chart

Image of nzdusd 15-minute chart

New Zealand’s Gross Domestic Product (GDP) report showed the growth rate increasing 2.6% after expanding a revised 3.2% in the second-quarter of 2018. A deeper look at the report showed Mining as the biggest contributor to growth as the sector grew 12.4% in the third-quarter, with Wholesale Trade climbing 1.1.% during the same period, while Utilities suffered a 2.3% decline after rising 4.1% during the three-months through June.

The New Zealand dollar struggled to hold its ground following the below-forecast print, with NZD/USD pulling back from the 0.6800 handle to close the day at 0.6774. Learn more with the DailyFX Advanced Guide for Trading the News.

NZD/USD Daily Chart

Image of nzdusd daily chart

  • Broader outlook for NZD/USD remains fairly constructive as both price and the Relative Strength Index (RSI) continue to track the upward trends from earlier this year, but the exchange rate may face range-bound conditions over the near-term as it appears to be stuck in a long-term wedge/triangle formation.
  • With that said, the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6960 (38.2% retracement) sits on the radar as it lines up with the 2019-high (0.6942), with a break/close above the stated region raising the risk for a run at the December-high (0.6969).
  • Next region of interest comes in around 0.6990 (50% expansion) following by the 0.7040 (50% retracement) zone, but failure to hold above the 0.6820 (23.6% retracement) to 0.6870 (78.6% expansion) area may trigger a move back towards 0.6780 (100% expansion) to 0.6790 (50% expansion).

Additional Trading Resources

New to the currency market? Want a better understanding of the different approaches for trading? Start by downloading and reviewing the DailyFX Beginners Guide.

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader series on how to effectively use leverage along with other best practices that any trader can follow.

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



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Forex

Crude Rally Testing Critical Resistance Zone

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In this series we scale-back and look at the broader technical picture to gain a bit more perspective on where we are in trend. Crude Oil prices have rallied nearly 10% from the yearly lows with the advance now testing a key technical resistance confluence around the 60-handle. These are the updated targets and invalidation levels that matter on the Crude Oil weekly price chart. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.

New to Oil Trading? Get started with this Free How to Trade Crude Oil Beginners Guide

USD/CAD Weekly Price Chart

Oil Price Chart - Crude Weekly - WTI

Notes: In last month’s Crude Oil Weekly Technical Outlook we noted that price was approaching 2018 pitchfork resistance with, “A topside breach of this formation / the high-day close at 57.14 targets more a more significant resistance confluence at 59.61-60.06 where the 50% retracement of the October decline and the 2018 open converge on the 2015/ 2016 pitchfork resistance- look for a larger reaction there IF reached.” Oil prices are testing this critical resistance confluence today on the back of a weak inventories report that showed a drop of more than 9.59mln barrels last week.

The focus is on a reaction off this threshold with the yearly advance at risk near-term while below. A weekly close above would be needed to suggest that a more meaningful low was registered in December with such a scenario targeting the 52-week moving average at ~62.82 and the 61.8% retracement of the 2018 decline at 63.68. Key support and bullish invalidation now rests back at 55.21/53– weakness beyond this threshold would risk substantial losses for crude prices.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

Bottom line: We’re looking for a reaction on this stretch into confluence resistance at 59.61 – 60.06. Watch the weekly close- below would highlight the threat for a near-term correction / exhaustion in price. From a trading standpoint, a good place to reduce long-exposure and raise protective stops. We’ll be looking for possible price exhaustion heading into next week IF crude prices respect this threshold into the close. I’ll publish an updated Crude Oil Technical Outlook once we get further clarity in near-term price action

Even the most seasoned traders need a reminder every now and then- Avoid these Mistakes in your trading

Crude Oil Trader Sentiment

Oil Trader Sentiment - Crude Positioning - WTI

  • A summary of IG Client Sentiment shows traders are net-short Crude Oil – the ratio stands at -1.04 (49.1% of traders are long) – neutral reading
  • Long positions are 4.2% lower than yesterday and 5.7% lower from last week
  • Short positions are 8.2% lower than yesterday and 1.5% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise. Yet traders are less net-short than yesterday but more net-short from last week and the combination of current positioning and recent changes gives us a further mixed Oil – US Crude trading bias from a sentiment standpoint.

See how shifts in Crude retail positioning are impacting trend- Learn more about sentiment!

Previous Weekly Technical Charts

Learn how to Trade with Confidence in our Free Trading Guide

— Written by Michael Boutros, Technical Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex

https://www.dailyfx.com/crude-oil/how-to-trade-crude-oil.html?ref-author=Boutros



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US Market Open: Top 3 Market Drivers

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Market Themes and Movers – Brexit, FOMC and US-China Trade.

GBP: Another day of confusion and conflicting Brexit deal/delay talks continue to leave Sterling rudderless. Despite the current impasse the British Pound remains bid, although it is becoming increasingly vulnerable to short, sharp moves as news flows continue. The latest round of media reports suggest that PM May is looking for a three-month Brexit delay from EU negotiators although putting a revised meaningful vote to Parliament cannot be ruled out. UK inflation data released this morning showed little change and was put aside as traders focus on Brexit updates.

USD: The latest FOMC monetary policy decisionswill be released later in the UK session with monetary settings expected to be left unchanged. Traders will look for clues from Fed Chair Jerome Powell on the future path of interest rates, via the dot plot, and his latest thoughts on balance sheet normalization.

Gold/Oil: Both gold and oil are struggling to make further headway with one eye on the FOMC meeting and the other on the latest US-China trade negotiations with US President Donald Trump tweeting yesterday that talks were going ‘very well’. As with Brexit, the situation remains fluid with news flows again the dominant driver for trade war risk sentiment. With global growth falling, any positive trade news should underpin oil at its present level and may well give it a further leg-up in the short- to medium-term.

Professional Crude Oil and Energy Trading Fundamentals – Brynne Kelly.

Chart of the Day – US Dollar Basket – Over to You Fed

US Market Open: Top 3 Market Drivers - Brexit, FOMC and Trade Risk

DailyFX Economic Calendar: For updated and timely economic releases.

How to use IG Client Sentiment to Improve Your Trading

Retail sentiment is an important tool for any trader to help gauge market sentiment and positioning. We provide updated daily and weekly positional changes on a wide range of currencies and asset classes to help decision making.

Market Movers with Updated News and Analysis:

  1. Sterling (GBP) Price Slips on Renewed Brexit Confusion, UK Inflation Stable.
  2. Preview for March FOMC Meeting and US Dollar Price Forecast.
  3. Trading Outlook for Gold Price, Crude Oil, Dow Jones and More.
  4. FTSE Technical Analysis – Support on Dip, New Levels of Resistance Targeted.

— Written by Nick Cawley, Market Analyst

To contact Nick, email him at Nicholas.Cawley@ig.com

Follow Nick on Twitter @nickcawley1



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