Talking Points:

  • A rise in risk appetite was a primary theme in the session to open the week from US and global equities to VIX to high-yield
  • The Yen crosses offered a wide array of options should risk trends take, but Dollar should be evaluated thoroughly
  • Strong trend from the Yuan and Gold follow different motivations, top listing for scheduled event risk ahead through Pound

With EUR/USD and GBP/USD retreating holding and tentatively retreating from their respective key resistance levels, how are retail traders positioning? Find the long-short balance on the majors on the DailyFX sentiment page.

We are so far defying the seasonal assumptions attached to the capital markets for September. Historically, this is the only month of the calendar year that sees the S&P 500 lose ground on average; and volatility historically peaks between this and next month according to the VIX. To start the new trading week, the broad US equity index charged higher with the best daily advance since April and subsequently closed at a record high. Meanwhile, the volatility index shed 1.5 vols to drop back below 11. This was far from a US-based sentiment swing as well. Global shares advanced along with high-yield, emerging market and carry assets. It comes as little surprise in this environment that the Yen was the worst performing currency on the day. The top liquidity pairs in USD/JPY and EUR/JPY jumped but carried little of the sense of conviction of some counterparts. GBP/JPY and CAD/JPY set high stakes with medium-term inverse head-and-shoulders neckline break and long-term wedge breakout which will prove difficult to sustain much less project. Among these crosses, the NZD/JPY looked to be the most appealing mix of technicals, fundamentals and market condition for trading purposes.

One of the most heavily-debated fundamental alignments of the past years was once again on display in a Dollar recovery. This is a very nascent rebound considering it is the first pick up from last week's close at more than two-and-a-half year lows, but it is also prominent for that very reason. In previous years, the Greenback was the most direct benefactor of risk appetite as it carried the sole promise for tighter monetary policy - which translates into future yield. Ideal market conditions further that sentiment, but does it necessarily benefit the Dollar? We have the Bank of Canada hiking rates and heavy speculation fueling anticipation for an ECB hike a little over the horizon - not to mention actual carry from the likes of the Australian and New Zealand Dollars. One pairing where the Dollar's appeal is starting to skew favorable regardless of the sentiment lean is EUR/USD. In the event of favorable tailwinds for policy tightening, the Fed's tightening is already underway and simply accelerate. The ECB is still some ways away from making its first moves and speculation is already heavily responsible for its current loft. That doesn't mean EUR/USD has to reverse with channel support under pressure to start this week, but it does shift the balance for speculators.

Among other strong movements in the FX market, the New Zealand Dollar is one of the weakest majors over the medium term with deeper technical support levels in site or at hand. Yet, with little scheduled event risk on tap, the currency may be open to rebalancing if not an overdue risk rebound on carry appeal. I'm watching NZD/JPY, GBP/NZD, AUD/NZD and NZD/CAD. The Sterling was unexpectedly strong to start this week. While it didn't mount enough motivation to overtake the Dollar to win a break of trendline resistance for GBP/USD; the currency did register impressive developments on pairs like EUR/GBP and GBP/AUD. Yet, the course for this recovery is fraught with event risk and dominant themes. We have UK inflation ahead followed by jobs on Wednesday and housing activity after that. Parliament is debating Brexit and the Chancellor is due to speak while the BoE will deliberate on Thursday. This is a risky currency for FX traders to consider. Outside traditional FX, the cryptocurrency market is seeing reality of regulation and speculative concentration starting to swing back with Bitcoin, Etherium and Ripple setting up technical patterns suspiciously threatening of reversal. And, then the anti-currency, gold, offered up a sharp pullback to confirm a trendline and undermine the confidence that fiat was falling apart. We discuss all of this and more in today's Trading Video.

To receive John’s analysis directly via email, please SIGN UP HERE.

EUR/USD Sets Stage for Reversal, S&P 500 Closes Record, What Next?EUR/USD Sets Stage for Reversal, S&P 500 Closes Record, What Next?EUR/USD Sets Stage for Reversal, S&P 500 Closes Record, What Next?