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Trading Video: A Return to Risk Focus from SPX to Dollar to Pound

Trading Video: A Return to Risk Focus from SPX to Dollar to Pound

2016-06-29 02:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The Brexit hangover will last for a while, but its primary influence over risk trends is already diminishing
  • With the sentiment needle already moving; minding the big-picture, unresolved threats is crucial
  • Trading should be focused on volatility, but 'tactical' approach should not be too short-term or tech-oriented

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Markets are normalizing from the pyrotechnics last week. That doesn't mean, however, that we should revert to the same style of trading that was optimized to pre-Brexit conditions. Volatility is still high historically, and there is a growing consciousness of the expanding global risks with increasing cynicism over policy authorities' ability to keep the markets quiet. These are conditions ripe for the development of larger and more systemic trends - particularly large scale risk aversion. However, trading for the time frame / volatility / analysis orientation / theme that is before us is crucial.

There is still certainly global influence to draw from the Brexit aftermath, but its preeminence in the fundamental ranks will certainly fade. The procedural side of the event will take over for the volatile speculative reaction, and the Sterling should stabilize to some degree. That doesn't mean quiet trading, but it does mean less extreme erraticism. The Euro's fundamental exposure in contrast will continue to build on this outcome as the implications of European Union and Monetary Union (single currency backdrop) stability are put into deeper relief. EUR/USD is standing at its 200-day moving average and contemplating its primary fundamental bearing.

Meanwhile, the focus and anxiety surrounding 'risk' itself will remain with a higher resting rate of normal. That intensifies the threat of triggering a systemic sentiment move. We have seen Brexit headlines carry the market's fear; but there are plenty of issues that can take up the baton for influence. Failing confidence in monetary policy, recognition of a stretched speculative market, or even specific concerns like a renewed China threat are probable sparks. This theme will be particularly important for trading equities, Yen crosses, Dollar, commodities - and certainly crucial in aligning these different assets. We look at the tradable landscape going forward in today's Trading Video.

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