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Dollar's Fed Speculation Run Cools, Pound Looks to Brexit Data

Dollar's Fed Speculation Run Cools, Pound Looks to Brexit Data

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar's strong charge Friday was followed by a stagnant Monday with unflattering PCE inflation statistics
  • Market conditions are still the strongest force to contend with in holiday, seasonal and structural liquidity drain
  • Top event risk Friday is the collection of UK event risk that reflects upon Brexit fears

Harness the power of big data to evaluate millions of historical price points to calculate the probabilities of short-term market moves using the GSI Indicator.

Just as quickly as the Dollar charge started this past Friday, it stalled to start the new trading week. Fed Chair Janet Yellen and her colleagues drew the focus to US rate speculation, but their most recent effort to make forward guidance relevant hasn't broken the facade of skepticism that has hardened for the market in 2016. The opportunity for data to keep the hawkish run engaged Monday missed when the Fed's preferred inflation reading (the PCE deflator) held little changed from its holding pattern well below target. While FOMC member talks and indicators are scattered through the week, the next concentrated event risk for rate speculation isn't until Friday's NFPs release. And, the closer we get to the extended holiday weekend, the lower the potential for big moves.

On the risk front, the Fed speculation never established a foothold. Barometers like the S&P 500, Emerging Market and High Yield Corporate Bond ETFs, and Yen crosses saw limited movement Monday and restrained volume. Given the restraints of holiday and seasonal liquidity drain crashing into a structural, moral-hazard drain; performance on the sentiment front favors those setups that are short-term and congestion-oriented rather than big breakouts or expansive trends. Pairs like USD/JPY and AUD/USD are better candidates than S&P 500 which would have to choose a major breakout whether bullish or bearish.

Looking ahead to the upcoming session, the same liquidity restraints remain. Volatility is possible, but follow through is a more significant struggle. In the event risk ahead, short-term swells in activity are more likely than sizable moves. In particular, the British Pound will be of interest. GBP/USD, EUR/GBP and other Pound crosses have seen their ranges narrow to extremes. With an innate focus on 'Brexit' fallout, the data of August consumer and business sentiment surveys, mortgage approvals and consumer credit (July) will reflect on the UK's economy post vote. There is a high-water mark to surpass with the market already pricing in a recession and pain, whether extending the decline or easing fear. We discuss market conditions, Dollar momentum and Pound standing in today's Trading Video.

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