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Dollar Jumps as Fed Speculation Drops, Pound Readies for Flood of Data

Dollar Jumps as Fed Speculation Drops, Pound Readies for Flood of Data

John Kicklighter, Chief Strategist

Talking Points:

  • The first day of full liquidity after the seasonal US holiday weekend offered little true conviction
  • A sharp drop in US service sector activity cut September Fed hike forecasts to 24% and in turn battered the Dollar
  • Technicals and fundamentals mark the Pound, Dollar, Yen and Aussie Dollar as key FX markets to watch

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The first day of active trade following the seasonal transition around the US Labor Day holiday offered little conviction for trend or speculative momentum. That was expected. It will take time for the markets to recharge especially given the curbs on volatility and participation that have resulted from excessive stimulus. That said, the day was not without its volatility. The past session saw a strong drop from the US Dollar following a particularly painful drop from the ISM service sector activity survey. Following the surprising contraction of the manufacturing sector last week, this measure hit a six-and-a-half year low in August on the biggest drop since the Great Financial Crisis. And, the implications here are far more substantive given the US economy's output and jobs are heavily concentrated in services. Rate expectations responded promptly with a September hike cooling to a 24 percent probability and the Dollar suffering one of its biggest single-day losses of the year.

After the smoke clears from the disappointing report, the Dollar has found itself at the technical boarders of a number of crosses. Among the more remarkable pairs for technical bearings are GBP/USD, USD/JPY, AUD/USD, USD/CAD and NZD/USD. Given that we are still dealing with markets that are struggling for conviction and consistency, a Greenback-centric next move could very well favor range as the rate forecast fodder eases. However, pairs must be chosen carefully as there is notable fundamental risk with the Pound, Yen and Australian Dollar. Of these, the Sterling is arguably the most potent volatility risk with a range of event risk spread through the entire session that will give key Brexit update. Where are the opportunities and where are the risks? That is the focus in today's Trading Video.

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