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Will the Fed Break the Dollar’s and S&P 500’s Calm?

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Talking Points:

  • Neither the promise of peace from the US-North Korea summit nor the provocations from the G-7 summit have unseated risk
  • Top event risk ahead is the FOMC rate decision whereby the market is certain of a hike but less sure of all 2018
  • Beware if you intend to trade the Euro or Pound, the ECB rate decision Thursday and Brexit votes are still ahead

Are you trading any Dollar based majors? Concerned about what the gradual policy shift from the Fed means for general risk trends? Join me for live coverage of the FOMC rate decision. Sign up on the DailyFX Webinar Calendar page.

Neither Threat of Trade Wars Nor Promise of North Korea Peace Charges the Markets

Risk trends are the foundation of all market trends in one form or another. Everything else is simply a catalyst that can charge the collective appetite of adding to risk exposure or wind it down. It is with that view on the market’s undercurrent that we should assess the implications of this week’s remarkable stoicism. We didn’t register the concern that naturally follows the weekend’s headlines relaying the United States’ efforts to further isolate it from trade partners with President Trump escalating the row with some of the country’s closest trade partners. Yet, disarming interpretations that this is evidence of a bullish bias that thwarts uncertainty, this past session showed little yield to optimism following President Trump’s meeting with North Korean leader Kim Jong-un in Singapore. This is a familiar picture of complacency at work. Until something forces speculators to make a choice, the market rank may leave the burden of picking a long-term view for the future. Or, perhaps, what we have seen in the opening 24 hours of the week is anticipation for a more action-packed event?

Will the Fed Break the Dollar's and S&P 500's Calm?

Before There Was Global Trade Wars, There Was Monetary Policy

The economic and political relations between the world’s largest economies is exceptionally important to the course of the financial markets moving forward, but it isn’t the only key theme that holds substantial sway over investors’ course long-term. It is easy to forget the importance that monetary policy plays to our current standing an path forward as the major central banks have proven remarkably effective at directing expectations through their forward guidance. That said, the past decade of general bullish reach was made possible by the extremely accommodative policies from the Fed, ECB and other major central banks around the world. Near-zero rates and unorthodox stimulus programs translates into easy access to funds and an implicit support for speculators that was famously referred to as ‘moral hazard’. These crisis-era policies extended well past the actual crisis conditions following the ‘Great Recession’ and arguably inflated speculative appetites beyond the constraints of a simple growth-supporting financial recovery. Yet, we have seen a slow tide shift towards normalizing from the extreme support rolled out by these groups. At what point is it recognized as a withdrawal of support? When does it become a burden to speculative excess? This week will prove a great litmus starting with the Fed decision Wednesday.

Will the Fed Break the Dollar's and S&P 500's Calm?

The Fed Will Hike Rates, But What More Will They Do?

There are two general paths of influence for Wednesday’s FOMC rate decision: the short-term implications of the contrast the Fed draw to its counterparts and the long-term recognition that the era of ‘easy money’ is slowly receding. For the Dollar, the market impact is still more readily registered through the latter. As it stands, the market is virtually certain that the US central bank will hike its benchmark rate for the second time this year by 25 basis points to a range of 1.75 to 2.00 percent. That furthers its technical advantage versus nearly every other major for yield; but as we saw in 2017’s slide from the Dollar, a considerable portion of this speculative appeal has been discounted. The real fundamental weight is behind speculation for the Fed’s course moving forward. Fed Funds futures are still split between three or four total hikes in 2018 (futures show a 46 percent chance of four), but that sets the bar even higher than what it already is relative to counterparts. If risk appetite is so robust that a slight increase in yield advantage is sufficient to revive the speculative reach, it is possible that the Fed holding its advantageous course can re-establish the Dollar’s medium-term upswing. A faster pace of hikes would do even better in that environment. That said, we don’t seem to have that backdrop. Instead, it is easier to disappoint and there is a larger premium to work off should they disappoint hawks. Pairs like the NZD/USD, AUD/USD and USD/CAD are better positioned to leverage the Dollar’s swing. EUR/USD is arguably the worst option.

Will the Fed Break the Dollar's and S&P 500's Calm?

Anticipation: The Trouble with EUR/USD

In the event that the Fed triggers a speculative run – bullish or bearish – for the Greenback, the most troubled counterpart to select for the currency would be the Euro. While the present bearings for the Fed and ECB couldn’t be any more different, speculators value the outlook. Where the US policy authority has gone through pains to set the market’s appreciation of its course, the outlook for the European Central Bank is in considerable flux. It is that background that will ramp up anticipation for this group’s policy meeting on Thursday and in turn curb speculative ambition before it is clear whether they intend to fully taper their QE program over the coming months and set put the bank on pace for its first hike by mid-2019. The EUR/USD is not the only pair that will have to deal with cross currents. Cable is another major that looks ripe for trade potential, but ongoing Brexit votes laden it with an uncertain path of volatility ahead. If you are looking to avoid systemic issues like risk trends, trade wars and critical monetary policy turns; consider the Canadian, Australian and New Zealand dollars. We discuss all of this and more in today’s Trading Video.

Will the Fed Break the Dollar's and S&P 500's Calm?

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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