Talking Points:
- The Dollar's climb continues after the Fed's hawkish policy shift with appealing EUR/USD, USD/CAD and NZD/USD setups
- Risk trends have yet to find their universal motivator, but cracks are showing in areas like the emerging markets
- A BoE split Thursday surprised Pound and FTSE traders, will the BoJ decide not to be left behind?
Retail speculators are rapidly building up their long exposure in Oil with support currently under pressure. How are they positioning in the S&P 500, FTSE100, EUR/USD and other benchmark? Check the DailyFX Sentiment page to see.
The fuse lit by the Fed Wednesday continues to burn through the markets. This past session, the US Dollar extended its rebound with the realization of its monetary policy advantage sinking in. The rise from six-months of slide alone carries considerable potential and the fundamental motivation can keep a steady fundamental wind to the currency's back so long as something more shocking and/or equally systemic doesn't arise - like risk trends. With the Greenback's lift from its own confluence of support, we see the EUR/USD's reversal from 1.1300 extend to further clearing of technical support. For those taking the conservative approach and looking for additional milestones to confirm conviction, this is a welcome sign. The USD/CAD meanwhile has showed its deference for long-term trendline support, but has yet to truly leverage the Dollar's fundamental turn nor the disparity from the long-standing correlation with crude oil prices. Clearing through some conflicting fundamental event risk, the NZD/USD presents a more appealing opportunity with its persistent trend channel under pressure and the New Zealand 1Q GDP reading behind us.
One Dollar pair that isn't following a clear path is USD/JPY. The rebound this past session fits the Dollar's performance, but the move also conflicts with general sentiment trends. Speculative appetite through its many different financial outlets had shuddered but did not commit to full capitulation or retrenchment. Yen crosses were up across the board as were carry indexes like that from Deutsche Bank. Yet, the realization of the slow central bank turn from limitless support started to seep into the S&P 500 (with a gap lower on the open), emerging markets and some other corners. While there are is more evidence that risk aversion is starting to gain traction, full conviction it is not. When sentiment truly does reverse course in the psyche of the financial system, it will show in a wide correlation and meaningful momentum. The potential a change in speculative tide represents to the entire system is so enormous, that it is critical to keep tabs even if it is not immediately underway.
From theme to event, the Pound and FTSE100 were dealt a surprise when the Bank of England (BoE) rate decision showed an unexpected split in the policy vote. While the central bank didn't lift rates, three members of the MPC voted for such a move. That is a contrast to their bearings to this point with the QE booster this past August and a rate hike during that same time frame. Given this shift has developed despite the uncertainty that follows last week's election outcome, the march towards a hike may be a strong one - something that can help lift a substantially devalued Pound on pairs like GBP/NZD, EUR/GBP or even GBP/USD. Looking out over the next and final 24 hour session ahead, we are in the midst of thematic change with monetary policy coming back into form, risk trends threatening to reengage and geopolitical risks an ever present spark. For scheduled event risk, the Bank of Japan rate decision has no time and is expected to hold - as usual - but beware; the global policy spectrum is slowly shifting and they have a tendency to deliver surprise. Meanwhile, the day 2 of the EU summit may find a diminished capacity to shift the Euro or regional markets after an agreement to release 8.5 billion in funds to Greece hit the newswires after the first day. The University of Michigan sentiment survey, UK credit review (DBRS), quarterly derivative expiration and Bitcoin's volatility all deserve our attention. We discuss all of these themes and events with their trade potential in mind in today's Trading Video.
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