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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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Asian Stocks Hold Up As Markets Look To Fed, US Dollar Gains Too

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Asian Stocks Talking Points:

  • Stock markets made modest gains to start a new week
  • Hopes for a dovish Fed seem to be lifting the market
  • However, there are numerous potential worries below the surface

Find out what retail foreign exchange investors make of your favorite currency’s chances right now at the DailyFX Sentiment Page

Asian stocks were cautiously higher on Monday as investors looked with hope to this week’s Federal Reserve monetary policy meeting. There is some sense that the US central bank will steer a dovish path into 2019, with perhaps fewer interest rate hikes in prospect than have been seen this year.

Still, there was plenty of caution around too. The Bank of International Settlements said that recent market selloffs may not be an isolated event, with more volatility likely as monetary policy is normalized. The Nikkei 225 managed to gain 0.7% Monday afternoon, with Shanghai and Hong Kong up by 0.1% apiece. The ASX 200 added 1%, with bank stocks leading the way.

The Australian stock benchmark remains under clear pressure on its daily chart but a key short-term support zone between this year’s lass two significant lows continues to hold the bears in check.

ASX 200, Daily Chart

Foreign exchange markets seemed a little gloomier than their equty counterparts, with haven currencies such as the US Dollar and Japanese Yen benefitting at the expense of more clearly growth-linked units. The US Dollar index hovered near 19-month highs.

That Dollar strength took a modest toll on gold, while crude oil prices were hit by worries about likely future demand level. These worries come in the wake of weaker than expected economic numbers from both China and the US in recent weeks.

Monday’s remaining economic data schedule is a little sparsely populated. The final eurozone Consumer Price Index for November is coming up though. Then the focus will move across the Atlantic and on to the house building market. Canadian existing home sales figures are due as is the housing market index from the US National Association of Home Builders.

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!



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Australian Dollar Bulls Might Get A Little Help From The Fed

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FOMC may bring AUD/USD Volatility

Fundamental Australian Dollar Forecast: Bullish

  • The US Federal Reserve is likely to dominate AUD/USD trade this week
  • It will give its December policy call on Wednesday
  • Any sign of a more relaxed policy view will continue to support the Aussie, despite that currency’s own utter lack of interest rate support

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar’s revival of fortunes against its US cousin goes on, underpinned as it has been since its November beginnings by two key factors.

The first is hope for a trade rapprochement between Washington and Beijing. China is the prime customer of Australia’s vast raw-material export machine, while the US is an indispensable partner for Canberra on security matters. So, Australia has much to gain from a trade thaw between the two global giants. More indeed than any other third country, arguably.

And no doubt trade headlines, if they come, will move the Aussie this week. But their timing is impossible to predict. Federal Reserve monetary policy meetings meanwhile are timed with scrupulous regularity. One is coming up early on Wednesday, Australian time.

That brings us to the second AUD/USD prop. Much of the pair’s recent vigor has been rooted in the thesis that US rates may not rise as much in 2019 as investors had previously thought. This seems reasonable. Economic uncertainties abound, from Brexit to rising US deficits and clear signs of economic slowdown around the world. Moreover, the Fed has already raised rates eight times from their financial crisis lows. A pause for reflection could be easily justified.

So the Australian Dollar market will likely be stuck like all others while it waits to see what the Fed has to say on Thursday.

It’s certainly worth pointing out that the Australian Dollar will lack interest rate support even if the US central bank does chart a more cautious monetary course into 2019. Aussie futures markets now see no increase to the country’s own record-low, 1.50% Official Cash Rate for at least eighteen months ahead.

Still, if the Fed delivers its expected December rate hike but then suggests it’s going to hold off for a while then AUD/USD will probably hold up and may make further gains.

It’s a bullish forecast this week.

AUD/USD has broken downward channel

Chart Source: IG.com

Resources Australian Dollar for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

— Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!



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Dow Awaits Fed, FTSE Looks to EU No-Deal Data. CAC to Protests

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Dow Awaits Fed, FTSE Looks to EU No-Deal Data. CAC to Protests

Equity Fundamental Forecast: Bearish

  • Fed to issue rate decision on Wednesday, followed by a press conference with potential to spur the Dow
  • FTSE will look to Brexit and the BOE decision with a watchful eye on events across the channel
  • CAC concerned with protests and reaction from Brussels on budgetary infractions

Global Geopolitical Concerns Weigh

This past week saw a mixed bag of trading days. A trade war breakthrough on Tuesday spurred markets but most gains were forfeited before the close. The latter half of the week erased any earlier gains as the major US indices sold off Friday. The outlook for global equities remains bearish on a lack of upside potential and persistent threats from Brexit, the Italian budget debate and similar concerns arising in France. One area with upside potential is the Fed’s decision on Wednesday.

Dow, S&P 500 Await Fed Decision

The Fed is scheduled for their final rate decision Wednesday. At present CME Fed Funds futures have the probability of a hike at 77.5%. With a hike largely priced in, the real price action will arise from Chairman Powell’s discussion with the press afterwards. The Q&A will allow Mr. Powell to expand upon his view for rate hikes in 2019 and given a series of dovish comments in recent weeks, could make the case for a bullish reaction in US equities.

Learn about the differences between the Dow, Nasdaq, and S&P 500.

CME FedWatch Tool (Chart 1)

CME FedWatch Tool

FTSE 100 Looks to EU’s No-Deal Documents, Bank of England Rate Decision

The FTSE 100 will again await Brexit news. On Wednesday the European Union is scheduled to release documents regarding their preparation for a no-deal Brexit. If their findings are particularly bleak, expect a slump in the FTSE along with the other European indices.

Brexit Impact on GBP: How the Pound Might Move After Parliamentary Vote

The FTSE will also look to the Bank of England. With virtually no chance the bank hikes their interest rate, any reaction will come from commentary on the case for future hikes. Expect this event to be overshadowed by the Brexit news and the Fed.

FTSE 100 Price Chart (2) Daily, Year-to-Date

FTSE 100 Daily Price Chart

CAC 40 Gets Stung

The French equity index will eye the ongoing yellow-vest protests. Already the movement has secured concessions from French President Emmanuel Macron, but the movement’s leaders say the protest will continue into next week. The tax cuts and wage increases offered by President Macron will draw the eye of the European Commission along with the French people.

See the other economic events in the week ahead with our Economic Calendar.

France may now find itself in a position like Italy with an unacceptable budget to GDP ratio and could face the ire of European Commission President Jean-Claude Juncker. The civil unrest and budgetary overspending will undoubtedly weigh on the French index and could spread across the continent as the bloc attempts to reel in its members.

CAC 40 Price Chart (3) Daily, Year-to-Date

CAC 40 Daily Price Chart

Bearish on Equities? Learn some successful bear market trading strategies and techniques.

As with last week, trade wars remain in the picture. There are no scheduled events but talks between US and Chinese officials are ongoing. With that in mind, be wary of trade war developments that could impact your equity positions. There appears to be little upside potential in many equity markets, so the forecast for the week ahead remains bearish.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact Peter on Twitter at @PeterHanksFX

Other Weekly Fundamental Forecasts:

Japanese Yen Forecast – USD/JPY Rate Fails to Test Monthly-High Ahead of Fed Rate Decision

Oil Forecast – Crude Oil Prices Swamped by OPEC Cuts, Global Growth Fears, Fed

British Pound Forecast – A Complete Lack of a Cohesive Government Blights Sterling

US Dollar Forecast –US Dollar May Rise as the Fed Checks Slide in 2019 Rate Hike Bets

Gold Forecast – Is Gold Posed to Lose its Luster?



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