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Beware Risk Trends Ignoring US Data, North Korea

Beware Risk Trends Ignoring US Data, North Korea

John Kicklighter, Contributor

Talking Points:

  • The languor from the holiday liquidity drain held over to Monday trade, but complacency seems to test patience
  • Risk aversion through Thursday didn't seem to pick up steam with poor US data and North Korea's missile threats
  • Keep an eye out for ranges like those on EUR/USD, GBP/USD and EUR/GBP; but be prepared for earthquakes

See the DailyFX Analysts' 2Q forecasts for the Dollar, Euro, Pound, Equities and Gold on the DailyFX Trading Guides page.

The stumble in risk trends that hit last week before holiday liquidity froze all the markets in place didn't survive the thaw Monday. While the offline European markets continued to break up the transmission of speculation intensity, there was a notable bounce in sentiment through the range of risk-oriented assets that were open for trade to start the week. The S&P 500's most recent, high-profile trendline break last week fell apart at launch with a jump Monday. Asian equity indexes, Yen crosses, and higher-degree risk assets (like the emerging market and high-yield fixed income ETFs for proxy) all put in for a rebound. There is little drive behind this move to speak to conviction, but there is certainly breadth. While there isn't anything here to say that optimists are 'backing up the truck', the environment in which this is taking place should keep us vigilant of the risk invited with such complacency.

While the markets traced out their half-hearted recovery to start this week, the fundamental backdrop offered up a heavily-skewed fundamental view. From last week, the US retail sales and inflation data that closed out the week were a significant downgrade to growth expectations for the world's largest economy. It would also hasten the dive in rate expectations. Fed fund futures show only one more rate hike from the Fed in 2017 is the leading scenario in the market's view. Reviving a global threat that had receded lately, the tangible threat of a global skirmish climbed dangerously with the headlines surrounding North Korea's warnings and test missile launch. While the potential for a direct conflict escalating to a world war has abated, this is not a situation where the risk justifies the assumption of return. Perhaps the only positive news was the Chinese 1Q GDP reading. While better-than-expected, basing global confidence on a round of data from a source that draws skepticism without true acceptance offers a hollow sense of optimism.

The vigil for a return to pull appreciation of the risk in the system - and thereby volatility - continues. However, until that day where market prices move to systemically close the gap to value; measured opportunities remain the realistic objective. And, there are plenty of options that seem to fit the category. Most liquid of the options is EUR/USD. While this pair faces both Fed rate expectations risk, the ECB professional forecasters' survey and a simmering risk attachment; a short-term break for this benchmark pair just puts us in a broader range. GBP/USD represents just one of a range of Pound crosses that may express the obsession in Brexit with a range hold. EUR/GBP and GBP/NZD face high-level technical boundaries while GBP/AUD and GBP/JPY have shown tentative breaks have no traction and false breakout reversal appeal. Speaking of reversal risk, gold faces down resistance from a trendline that originated with the 2011 record high and US oil is carving out a head-and-shoulders pattern in the top decile of its 55-47 range. We discuss the flashing fundamentals and practical opportunities in the markets in today's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.