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Dollar Recovers with CPI Jump, Risk Pressure Builds and ECB on Deck

Dollar Recovers with CPI Jump, Risk Pressure Builds and ECB on Deck

2017-01-19 05:14:00
John Kicklighter, Chief Strategist
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Talking Points:

  • A slide for the Dollar provoked by the President-elect was reversed Wednesday by a robust CPI bolstering rate forecasts
  • Risk trends are once again hitting extreme levels with not just the VIX deflated but SPX price tracking unprecedented range
  • Top scheduled event risk ahead is the ECB rate decision, but prevailing expectations project limited Euro impact

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Volatility continues to churn for the FX market. This past session, the Dollar took the honor of the most market-moving, major currency from the British Pound. There remains an afterglow to UK Prime Minister Theresa May's Brexit priorities speech Tuesday, but this speculative track seems to need motivation to keep running. The limited engagement UK jobs figures through the same session offered a boost to economic forecast, but it failed to hit the particular radar traders are currently monitoring for the Sterling. In contrast, the Dollar reverted from unpredictable catalyst to reliable theme in a transition from President-elect Trump's off-the-cuff assessment of an expensive currency to building Fed rate speculation via inflation.

While the incoming US President is a constant risk of volatility given his use of twitter to deliver policy, the market had a chance to settle after his latest musings. The market's favorite US inflation figure in the meantime would be bring Fed rate forecasting back to more stable data readings. Fed Chair Janet Yellen's remarks that the US was approaching the central bank's dual mandate was given credibility Wednesday when the headline CPI figures for December surpassed the group's 2.0 percent target for the first time in two-and-a-half years. She would also remark that whether the central bank follows up to December's hike would depend on the economy and data over the next few months, which seems to take the February 1 meeting out of contention and makes March 15 a dubious proposition at best. It remains to be seen if this favorable wind will carry trend however without a clear follow up on the economic docket.

Measuring trade potential in the next possible fundamental outlet, either the general theme in risk trends or scheduled European Central Bank (ECB) rate decision Thursday offer the most tangible milestones. For the upcoming rate decision, the probability of a significant change following the previous meeting's extension of the group's stimulus program is highly unlikely. However, that doesn't mean the event's market moving potential has been rendered inert. As arguably the most dovish major central banks in the world, the ECB's effectiveness can have serious sway over the Euro and the perceived effectiveness of global monetary policy. Risk trends are in contrast the stick of dynamite with unpredictable fuse. Speculative appetite is already extreme and motivation hard to gauge. Further leveraging the pressure of record high S&P 500 and anchored VIX though, we find the SPX average daily range as a percent of current spot is near a multi-decade low. Something has to give and the time for resolution grows closer with each day. We talk about what is moving in the markets now and where the pressure is building in today's Trading Video.

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