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Dollar's Trump and Pound's Brexit Volatility Settle, Keep An Eye on S&P 500

Dollar's Trump and Pound's Brexit Volatility Settle, Keep An Eye on S&P 500

John Kicklighter, Chief Strategist

Talking Points:

  • This week's top market movers - Dollar and Pound - cooled both trend and volatility as Trump and Brexit headlines slowed
  • Top event risk Thursday was the ECB rate decision, but a dovish tone offered little immediate Euro amplitude
  • Next week carries plenty of high-level event risk and key themes are constant threats, but top focus remain 'risk' trends

See the DailyFX Analysts' 1Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

The FX market has displayed a remarkable level of volatility this past week, but it the seas are settling into the close of the week. While there is event risk to keep track of through the final 24 hours and the pent up tension behind general 'risk trends' should not be overlooked for a second, the prominent themes are losing some traction and focus is turning to high profile event risk into the coming week. EUR/USD carried some of the most tangible potential through the past session to carry into Friday via the ECB rate decision. The central bank and its President Mario Draghi didn't disappoint with a dovish tone that held despite evolving inflation expectations. That said, the contrast to the likes of the Dollar are well established in current price and concerns about the fading effectiveness of this and other accommodative programs doesn't have enough momentum to mount the speculative masses.

More remarkable through the past session and heading into Friday is the settling of the Dollar and British Pound. Both have been stoked by key event risk, but the amplitude of their respective moves this week owes to the ability to strike the fundamental theme that resonates with the most traders. For the Sterling, the Brexit swings will almost certainly continue moving forward. That said, UK Prime Minister May's speech on priorities for the country in forthcoming negotiations has curbed some of the more severe positioning. Further milestones on this front - whether data or speeches - will likely continue to experience greater lift for the Pound with encouraging (or less-painful-than-expected) developments than tumbles for disappointing updates. For the Dollar, Fed speculation has already proven that it needs a steady feed of data to charge definitive momentum. The 'Trump' factor however is still open field.

Through the final session, we have the US Presidential inauguration. This ushers in a new area of policies that will no doubt change the landscape for the Dollar, US markets and even the global financial system. However, this ceremonial event likely carries little material influence itself. Nevertheless, given the incoming President's penchant for delivering policy with short notice, Friday volatility for the Greenback shouldn't be written off. Most pressing and every ominous is the position of 'risk trends'. Speculative-motivated assets have settled into a narrow holding pattern that is leaving many feeling uneasy. The S&P 500's extraordinary quiet trading at record highs reflects a contrast of extremes. From a benchmark like this, it's not difficult to see 'how much there is to lose'. Keep tabs on risk trends even outside of the scheduled event risk on the docket. We talk active catalysts and building pressure in today's Trading Video.

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