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Dollar Rebounds, Risk Trends Avoid Plunge, BoE and NFPs Beckon

Dollar Rebounds, Risk Trends Avoid Plunge, BoE and NFPs Beckon

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar took note of technical support for key pairs like EUR/USD and leveraged a rebound
  • The dangerous S&P 500 and global equities slip Tuesday steadied though a full-fledged fire is still a real risk
  • Top event risk ahead is the BoE rate decision with a market unprepared for its outcome and Friday's NFPs

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

A shift in underlying trends for the Dollar and 'risk' (equities, emerging market assets, etc) has begun but momentum will require a much stronger push. Financial system quiet is facing more immediate disruption though in impending event risk- most prominently today's BoE rate decision and Friday's NFPs. Despite the recent hiccup in activity across the financial system, activity levels are still extraordinarily low. A comprehensive and capable catalyst is needed - whether to forge sentiment (whether optimism or pessimism) or motivate trend for a specific area of the market.

The Sterling is facing critical event risk in the form of the Bank of England (BoE) rate decision and its accompanying Quarterly Inflation report. Already an important event in itself, the policy meeting's amplitude is bolstered by its Brexit implications. GBP/USD and the Pound plunged in the wake of the vote by the UK to break from the European Union in large part due to the fear of economic fallout and financial trouble resulting from the outcome. The central bank itself contributed to that gloomy outlook before the Brexit. After holding steady in July, expectations for preemptive action to avert economic or financial trouble were diluted. Furthermore, implied volatility around the event grew distorted - overnight projections are very high but a one-week outlook is remarkably quiet. With pain already significantly discounted, the heaviest impact for the Pound would follow promotion of stability in the UK markets...but that can be difficult to achieve for the BoE.

Given the global spillover from the US and Japanese monetary policy changes over the past week, we should monitor the impact that this even has on favored risk benchmarks (mine include S&P 500 and USD/JPY). Though skepticism can only go so far in forcing deleveraging in long-held risk exposure, and the group is unlikely to promote a dire warning to the world - central banks are in part cheerleaders of their respective systems. Stirring deeper changes in conviction is more likely for the US NFPs which are more objective as data. While we thread important event risk and watch bigger trends anxiously, it is worth seeking out those trade options that are not beholden such flippant events. We discuss the rise in volatility ahead in today's Trading Video.

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