Talking Points:
- Dollar begins to retrace recent rout, focus on 55-DMA at 98.688
- BoE sees three dissenters on decision to hold rates, UK 5yr Gilt yields rise aggressively w/ GBP
- JPY sells off ahead of BoJ as USD/JPY closes in on 111, BoJ expected to keep policy unchanged
- Sentiment Highlight: EU Equities pull-in retail longs, contrarian sell bias favored
The dollar continued the turnaround higher from Wednesday today on a move that now likely targets the DXY’s first weekly gain after three consecutive weekly declines. The USD was sold aggressively before the Fed’s rate announcement on the back of an inflation print and retail sales announcement that brought further doubt that we’d hear a hawkish message from the Fed. However, a hawkish (relative to market expectations) message is exactly what we got with front-end fixed income sellers emerging and dollar sellers covering their short positions. While expected volatility remains low for G10, we did go into the week with stretched short positions on GBP & USD that could see a few days and possibly weeks of retracements toward downtrend resistance.
In a different world where inflation is above levels of comfort when comparing to wage growth, the Bank of England came out with a rate hold that included three dissenters that were looking for a rate hike. On Wednesday, UK Core CPI came out at 2.6, which has the Bank of England’s attention who will look to prevent choking the economy that is suffering a bit under a cloud of Brexit uncertainty after the recent election that leaves PM May without her desired majority before formal negotiations begin. After the threedissenters (the most in six years) at the Bank of England had responded to the ringing alarm bells of inflation, the options markets began to buy protection against surprise moves higher in GBP. In a similar move, the 5yr Gilt yield rose by 12bp or ~34% from yesterday’s levels showing that the market is heading the rising dissents within the BoE that rate hikes could come sooner than expected.
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The market was caught a bit off guard from the hawkishness of the Fed and Bank of England. One evidence of the surprise is the rise in sovereign yield curves aligned with the drop in equities and commodities that could be facing lower growth and higher supply. The market will look to the Bank of Japan. Ahead of the Bank of Japan monetary policy announcement, the JPY has sold off, and the options market is beginning to price in further declines vs. the USD at the highest level in a month. Given the recent central bank action, and action yet to be seen, USD/JPY & GBP/JPY should remain on your radar to look for further clawbacks of recent moves.
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Closing Bell’s Top Chart: June 15, 2017, DXY turnaround continues on US data supporting Yellen
JPY BOJ Policy Balance Rate, 10-Yr Yield Target, & Kuroda speaks at press conference after MPM (JUN 16)
IG Client Sentiment Highlight: EU Equities pull in retail longs, contrarian sell bias favored
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
FTSE 100: Retail trader data shows 39.7% of traders are net-long with the ratio of traders short to long at 1.52 to 1. In fact, traders have remained net-short since Apr 24 when FTSE 100 traded near 7334.1; theprice has moved 1.1% higher since then. The number of traders net-long is 116.8% higher than yesterday and 23.0% higher from last week, while the number of traders net-short is 35.3% lower than yesterday and 22.7% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests FTSE 100 prices may continue to rise. Traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current FTSE 100 price trend may soon reverse lower despite the fact traders remain net-short.(Emphasis mine)
Germany 30: Retail trader data shows 52.7% of traders are net-long with the ratio of traders long to short at 1.11 to 1. The percentage of traders net-long is now its highest since Apr 11 when it traded near 12175.7. The number of traders net-long is 91.5% higher than yesterday and 39.1% higher from last week, while the number of traders net-short is 44.6% lower than yesterday and 22.0% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Germany 30 prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Germany 30-bearish contrarian trading bias. (Emphasis mine)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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