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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

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

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Talking Points:

  • The severe tumble in risk trends last week wasn’t threatening market stability through the open session of this new week
  • DXY has offered little clarity on direction as primary motivation is itself unclear, meanwhile the deficit hit a 6-year high
  • Euro and Pound are seeing the quiet before their respective Italian and Brexit storms, be mindful of your trade intent with each

What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 4Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

Risk Trends Steady to Start the Week, the Threats Remain Numerous

Like a life raft encircled by sharks, the risk-leaning benchmarks opened this week with an air of stability while the fundamental threats to the system remain distinctly unresolved. Following last week’s painful collapse in US indices – a move that motivated risk aversion far and wide – Monday’s steadfast conditions were welcomed by harried bulls. The balance was not simply isolated to US equities. European and Asian shares markets registered small movements, the emerging markets offered a measured gap lower without hitting new lows and the Yen-based carry trade eased up on its retreat. Yet, despite the implications such a correlation across diverse markets represents, there is more loaded speculative potential packed into the next move from the S&P 500, Dow and Nasdaq. These indices are still running a considerable premium to nearly every other high-profile ‘risk’ metric even after the deeper rout. The technical picture accurately reflects the circumstances moving forward. All three are hovering just above major trendline support which could readily signal a medium-term reversal in trend if cleared – in concert, the move would get on far more radars. Far more important is the sheer number of possible catalysts that can tip us back into selling pressure – or cue a notable rebound. Anticipation of the US Treasury’s call on Chinese polices keeps trade wars in focus (see the history of a century of trade wars here). Yields are at the mercy of risk trends and US Treasury yields specifically at the command of China. Growth forecasts were downgraded this past week for an otherwise ‘mundane’ threat. Earnings season hits its first ‘FAANG’ update (Netflix) Tuesday after the bell. Then there are the regional threats, which we discus below.

SPX Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

Dollar Is a Fundamental Stalemate with Too Many Charges to Keep Tabs On

When trading FX, it is difficult to avoid the US Dollar. However, given the state of its fundamental predicament, that may be an effort worth making. Whether we reference the trade-weighted DXY Dollar Index or an equally-weighted measure, there is a distinct lack of bearing on the benchmark. The picture is appropriately reflect via EURUSD, the most liquid currency bar none. There is a multi-year head-and-shoulders pattern that the pair tentative broke in August only to reverse course before conviction could take. What eventually resulted was an inverse variation of the same pattern where the break above 1.1725 again fell apart. Now trading around 1.1600, the Greenback has shown little intent to champion either bullish or bearish interests for the time being. That is not likely due to a lack of meaningful fundamental charge but instead it is more likely a side effect of an overabundance of meaningful themes tugging at the currency. For risk trends, there is not enough intensity to raise the focus on the currency’s safe haven status, but even its carry position has yet to be provoked this week. One fundamental signal that was prodded this past session but still abstract for most is the currency’s position as the unquestioned reserve leader. This United States deficit for 2018 was projected to $779 billion which equates to a 3.9 percent ratio to GDP. That is the largest dip into lending for the government since 2012 and furthers the concern that the country pushing the financing tolerance of the ratings agencies. Until we see one of these key themes take command of the currency’s bearings, it will prove difficult to trace its course.

DXY Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

Euro and Pound Tension Will Only Build into the Wednesday-Thursday EU Summit

As the Dollar flounders fundamentally, its largest counterparts are honing in on very specific fundamental themes. Yet, where there performance is riding on a single track, the outcome and timing of these uncertainties are problematically open-ended. Form the Euro, we were reminded that the currency’s future is under pressure. Following the growing discord between the Italian government and their EU/Eurozone counterparts this past weeks, the Italian Deputy Prime Minister Salvini remarked that the country doesn’t feel bound by the EU’s deficit rules – making a finer point to previous remarks that the country could increase spending if they don’t meet a generous GDP forecast and their belief that the European Central Bank (ECB) would bail them out should financial conditions grow strained. Prime Minister Conte’s remarks today and the two-day EU Summit Wednesday and Thursday will prove crucial. These particular events will very likely be more market critical than the Eurozone and Italian trade reports or the region’s investor sentiment survey from ZEW. The British Pound will also have a lot invested in the two-day meeting of the European leaders. This is a crucial ‘crunch’ event for the UK and EU to hash out a clear path for the divorce known as ‘Brexit’ (learn about the different possible Brexit outcomes in this special report). If this summit ends without resolution, the Pound is likely to tumble. Just as readily, a positive outcome will trigger a rally. Yet, after the collapse of talks between chief negotiators over the weekend and Prime Minister May’s remarks in Parliament Monday, the Cabinet meeting ahead will more likely set this event for a crash landing.

GBP Index Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

New Zealand Dollar Jumps after CPI Beat, Reminds of the Virtues of Discounted Majors

As convoluted as the backdrop seems for the likes of the Dollar, Euro and Pound; there are still options for the studious FX traders. The Canadian Dollar was given a serious charge this past session when the third quarter business sale survey from the Bank of Canada (BoC) showed an significant improvement. The general sentiment figure and lending survey were decidedly less encouraging, but these were reading taken before the breakthrough on the stalled NAFTA negotiations. Now the focus for the Loonie will more likely fall to BoC intent, so the next major update comes from Friday’s inflation update. Meanwhile, the New Zealand Dollar was prompted to a rally of its own with the release of the third quarter CPI (consumer price index) update. The 1.9 percent clip is still a ways from the upper threshold on the Reserve Bank of New Zealand’s (RBNZ) tolerance band for price pressures, but it nevertheless makes the next move decidedly more hawkish rather than dovish. Given the deep discount on the Kiwi these past months and the lack of response from the currency to last week’s risk flush, there is naturally more response to the positive news. I would expect the same for the Australian Dollar moving forward, but there the key event risk comes with the local employment report and third quarter business sentiment survey which will hit the wires at the same time. We discuss all of this and more in today’s Trading Video.

AUD/NZD Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

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

Written by John Kicklighter, Chief Currency Strategist for DailyFX.com



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Weekly Short Positions Increase 14% Sparking Bullish Bias

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GBP/USD: Weekly Short Positions Increase 14% Sparking Bullish Bias

Weekly Net-Long Positions Increase 17%

GBPUSD: Retail trader data shows 57.7% of traders are net-long with the ratio of traders long to short at 1.37 to 1. In fact, traders have remained net-long since Sep 20 when GBPUSD traded near 1.31492; price has remained unchanged since then. The number of traders net-long is 0.7% lower than yesterday and 19.9% lower from last week, while the number of traders net-short is 10.4% higher than yesterday and 14.9% higher from last week.

Having trouble with your strategy? Here’s the #1 mistake that traders make.

GBPUSD Sentiment Suggest That Price Could Rise

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Jake Schoenleb, DailyFX Research



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Euro Reversal Eyes Initial Resistance Hurdle

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Euro reversed off confluence support last week with the advance now approaching the first major resistance hurdles. Here are the updated targets and invalidation levels that matter on the EUR/USD charts heading into the start of the week. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.

EUR/USD Daily Price Chart

EUR/USD Price Chart - Daily

Technical Outlook: Earlier this month in my EUR/USD Weekly Technical Perspective we highlighted a key support zone at in Euro at 1.1436/97 (low-week reversal close and the 61.8% retracement of the August advance). Price registered a low at 1.1432 on October 9th with the subsequent rebound faltering just ahead of a key resistance confluence at 1.1617/27 – a region defined by the monthly open & opening-range highs, the 50% retracement of the late-September decline and the 100-day moving average. A breach above this level targets 1.1669 (breakout-zone for the Euro). Initial daily support rests at 1.1529 backed by the monthly low-day close at 1.1491.

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EUR/USD 240min Price Chart

EUR/USD Price Chart - 240min

Notes:A closer look at near-term price action shows Euro trading within the confines of an ascending pitchfork formation extending off the October lows. Note that the upper parallel converges on the 1.1617/27 resistance zone and further highlights the technical significance of this region. Initial resistance rests with the median-line (currently 1.1550s) backed by 1.1521/29 with near-term bullish invalidation now raised to 1.1497-1.15.

Why does the average trader lose? Avoid these Mistakes in your trading

Bottom line: EUR/USD is approaching near-term resistance targets which could see prices pullback a bit. From a trading standpoint, look for possible price exhaustion on a rally into 1.1617/27 – the trade remains constructive while above 1.15 with a breach above 1.1669 needed to fuel the next leg higher in price. The October opening-range is set – for now, I’ll favor fading weakness while within this formation. Keep in mind the EU-UK summit is on tap this week as well and may fuel increased volatility in the Euro & GBP crosses.

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

EUR/USD Trader Sentiment

EUR/USD Trader Sentiment

  • A summary of IG Client Sentiment shows traders are net-long EUR/USD – the ratio stands at +1.12 (52.8% of traders are long) – extremely weak bearishreading
  • Traders have remained net-long since October 1st; price has moved 0.2% lower since then
  • Long positions are7.8% lower than yesterday and 13.5% lower from last week
  • Short positions are 5.9% higher than yesterday and 0.3% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Yet traders are less net-long than yesterday & compared with last week andthe recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.

See how shifts in EUR/USD retail positioning are impacting trend- Learn more about sentiment!

Relevant EUR/USD Economic Data Releases

EUR/USD Economic Calendar

Economic Calendarlatest economic developments and upcoming event risk. Learn more about how we Trade the News in our Free Guide!

Active Trade Setups

– Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex or contact him at mboutros@dailyfx.com

https://www.dailyfx.com/free_guide-tg.html?ref-author=Boutros



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