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Fed Speculation Lifts the Dollar but Doesn't Fuel Equities Collapse

Fed Speculation Lifts the Dollar but Doesn't Fuel Equities Collapse

John Kicklighter, Chief Strategist

Talking Points:

  • An intense drop in risk assets and surge in volatility closed this past week on troubling footing
  • Fed speak did raise the chances of a rate hike, but that speculation is unlikely the charge for full spectrum risk
  • Risk appetite and Dollar bearing are key themes next week, while event risk and Brexit offer discrete influence

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

The volatility that we ended this past week off on stands in stark contrast to the extended period of inactivity that traders had to suffer through the preceding months. Anticipation and skepticism are subsequently being exuded in equal proportion with the market anxious for the open of trade Monday. Such an intense move draws obvious conclusions about its source and its depth. The former matters critically to the latter. It seems a leading explanation for the sentiment move that connects to the Dollar's rally was a reaction to rising Fed rate expectations. Yet, the probability of a hike has increased only marginally and the next gathering is still some time out on September 21st. A mild bump in rate speculation likely lifted the Dollar, but the sentiment downdraft comes from more elemental sources - which may actually prove a more impelling force.

Bearings and intensity of risk trends should be the number one concern for traders at the start of next week. There aren't many high profile events that hold the promise to single-handedly alter the sentiment of the financial system. However, if confidence is faltering under its own weight; the trend may prove permanent. For Dollar, Treasury and perhaps even risk traders; a close eye should also be kept on Fed rate speculation through the coming week. While the market's assessment of an impending hike rose meagerly this past week, there is evidence that the central bank may be positioning for a move of necessity. That would be significant as an indication of concern among key global policy authorities that they are losing credibility and options to forestall future troubles. In particular, FOMC board member Lael Brainard's comments will be particularly interesting on this front. Aside from the close monitoring of S&P 500 and Dollar; there is event risk to stir the Pound and Euro on Brexit views as well as discrete event risk to generate friction for the Aussie, Kiwi and Swiss Franc. We take a look at these intense markets and conditions in this weekend Trading Video.

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