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Dollar Hits 8 Month Low, Anticipation Will Warp Markets Wednesday

Dollar Hits 8 Month Low, Anticipation Will Warp Markets Wednesday

John Kicklighter, Chief Strategist

Talking Points:

  • Despite anticipation of this month's Fed hike and ongoing infrastructure stimulus talks, the Dollar hit an 8 month low
  • Risk trends remain as oblivious as ever, but the risk that spells increases as high profile risks approach
  • Events like Chinese reserves and the OECD economic outlook will be overridden by anticipation for Thursday

If you're trading either Euro or Pound crosses, upcoming event risk in the form of the UK election and ECB rate decision can significantly alter market course and pace. Join DailyFX analysts as they set the stage and cover the events live. Sign up on the DailyFX Live Webinar page.

We have entered the the gravity of Thursday's heavy confluence of scheduled event risk. The combination of the ECB rate decision, former FBI Director's testimony and UK General election pose very different and unique threats to the market. Yet, universally, they can all charge global risk trends. With threats to market stability with a shifting monetary policy backdrop, growing fissures in global relationships or political stability for a superpower ahead; we should expect the market to adapt. Large positioned placed with a sense of conviction are highly unlikely. Speculative interest with little appetite for long-term value and tolerance for drawdown is more likely. This will likely keep volatility dangerously near while also throttling the development of significant moves - trends or reversals.

Against this backdrop of anticipation, the Dollar still managed to show its pain through Tuesday's close. The ICE Dollar Index (DXY) slid to an 8 month low. This leaves the currency at the cusp of a 61.8% Fibonacci retracement of its range over the past two and a half years. As significant as that may be in technical terms, it is unlikely to play any more significant a role as the even levels and the mid-point of that same range before it. We can readily find a slip below that index floor or push of the cross equivalent from the EUR/USD or GBP/USD, but follow through will fall apart until the more important event risk ahead either reinforces a move or at least doesn't interfere. That same reticence is clear for the broader theme of 'risk.' Equity indexes from the S&P 500 to the DAX to the Nikkei 225 eased modestly from highs alongside emerging market, high yield and more extreme risk assets. As we close in on Thursday's whirlwind, keep a close eye on what last minute adjustments are made and where. This can be a sign from the market as to where it feels its greatest risk exposure is and thereby needs to be hemmed. While the extreme bearings of the collective speculative markets and the shockingly low holding of hedge suggests the speculative ranks isn't going to fully rebalance - it can at least exposure where the most extreme cracks are developing.

For the forthcoming 'no man's land' session, there will still be a round of event risk that will be important to monitor and incorporate in forecasts. Most comprehensive will be the OECD's economic projections. One of the greatest inequities in growth readings is the different scales utilized by different regions and institutions. This puts all these measures on an event - and potentially more honest - playing field. Another big picture update will come from the Chinese foreign reserves update. The country has been more active in guiding its exchange rate while attempting to keep its financial and economic balance. Its trade partners have in turn been more vocal of its criticism. In contrast, the Aussie GDP update is more specific to its respective currency; but the more concentrated impact can leverage a larger - if shorter - impact. For markets to watch in this interim period, commodities stand out as an asset class with many of the wide indexes and ETFs standing at significant 12-15 month range support. In contrast, Gold has dispelled any question that it has broken resistance in the form of a descending trendline starting from its 2011 record high. Also, Bitcoin has regained its mantel as the speculative darling with its revived charge and quick approach of $3,000. We look across the market to assess what is moving, what isn't and a game plan for the inevitable change 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.

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