Talking Points:
- After the votes were tallied Prime Minister May lost the majority, making Brexit and the Pound more difficult to negotiate
- While 'risk' assets ended the week moderately higher, a drop in market leading tech shares Friday rattled sentiment
- There are four major central banks due to deliberate on monetary policy next week, but the Fed is the top concern
Are you trading Dollar pairs? If so, the Fed rate decision on Wednesday can leverage serious volatility and even trend for the Greenback. Sign up to watch the FOMC decision live with me on the DailyFX Webinar page.
The markets are fighting the quiet slide into the typical seasonal lull in activity. This past week offered up a few jolts of volatility, and the increasingly reactive nature of the market paired with event risk like Wednesday's FOMC decision may permanently revive trading conditions. Through the second half of this past week, the UK election reached a deeper fundamental nerve than what many had anticipated. The second surprise UK vote in a year provided a strong Pound reaction. Prime Minister Theresa May's Conservative party unexpectedly lost seats in Parliament and subsequently lost the majority along with the mandate to drive forward a clear Brexit negotiation position. With a more difficult divorce ahead, the Sterling may find its past months of slow build up can continue to deflate. While there are some Sterling pairs that have notably slid below support (like GBP/USD) others stand at the threshold and look ready for conformation (like EUR/GBP, GBP/JPY and GBP/CAD).
Given, neither the outlook for the Brexit negotiations nor the UK's financial and economic health are any clearer after the vote; it is reasonable to expect the Pound's course is still ahead of it. Another bout of activity that may point to something more systemic ahead was the tumble from US technology stocks through this past Friday's session. Companies like Google, Apple, Amazon and Netflix were champions of risk appetite on the way up; so their about face is concerning. That said, there was a dramatic contrast between the tech-heavy Nasdaq indexes/ETFs and their blue chip counterparts like the Dow Jones Industrial Average (or DIA). The drop in the ratio between the QQQ and DIA Friday was the largest since October 2008. We've see a number of fuses for risk trends fizzle out in the past years, but that doesn't mean we should be any less prepared for the eventual and inevitable turn. The week ahead will again pit the belief that June is consistently the quietest month of the year against the unique circumstances currently facing the markets.
For more specific event risk milestones through the coming week, the monetary policy theme will find considerable exercise. The US Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank will all deliberate on policy. These central banks run the full spectrum. On the one end, we have the BoJ which is arguably the most aggressive dove amongst the major institutions as it remains engaged in an open quantitative easing (QE) program with no viable end date in sight. The SNB is the dark horse where an extremely accommodative stance - a benchmark range of -1.25 to -0.25 percent - has kept it anchored to its Euro counterpart for years. The BoE will have to assess its limited round two QE engagement against the new complications dealt the Brexit and economy after the vote. Yet, it is the FOMC decision that will truly have the market on edge. This event is expected to end with a rate hike - but that is where the bar will be set. The true influence of the outcome will rest with the forecasts which the market show considerable debate through the second half of 2017. Keep tabs on equity indexes, the Dollar Pound and more heading into the new week. We discuss all of them in this weekend Trading Video.
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