Talking Points:
- US equity indexes hit a simultaneous record high, but risk conviction is flagging with momentum and consistency
- EUR/USD dropped below 1.19 to weigh the first line of trendline support and subsequently raise speculation of reversal
- Top event risk ahead is the BoE rate decision leveraged with strong CPI data; but US CPI, Aussie jobs and SNB decision matter
As EUR/USD's slide breaks trendlines, are retail FX traders positioning for a full reversal? How are speculators trading the Pound crosses with the BoE rate decision on tap? See up-to-date positioning data for both on the DailyFX Sentiment page.
The risk drive is fading while the monetary policy theme looks ready to wrest back speculators' attention. This week started with a strong and explicit jolt for investor appetite. The gaps on benchmarks like global equity indexes as well as the uniformity of 'risk on' across the variety of sensitive asset classes supported the targeted focus. Yet, that drive was always bound for difficulty. With so many assets trading at expensive levels and underlying fundamentals showing little material improvement, it was up to speculation to carry the torch. And, their appetite is increasingly met with skepticism as absent momentum forces traders into shorter and more loosely held positions. The lack of conviction was fully on display this past session as many risk assets were little changed or actually slightly off the previous day's levels. The clear champion for bulls were the US equity indexes - S&P 500, Dow Jones Industrial Average, Nasdaq Composite - which all closed at record highs. That said, their performance barely registered in the green.
Regardless of what pair or asset class where are in, we cannot afford to ignore sentiment trends. It is a theme that is too comprehensively influential and has in turn seen a severe imbalance in exposure towards risky assets. Yet, as we await for resolution - or another dose of anesthesia - there are other themes that can take over the market's interest. Monetary policy has been a consistent driver, particularly for the FX market. That is certainly true of the two benchmark currencies throughout 2017. The Euro's surge through the year and the Dollar's tumble have reflected not current policy disparity but rather expectations moving forward. The US central bank which had stockpiled speculative premium for its early move to normalize policy and introduce four rate hikes has recently found the market raising questions as to how committed to their pace they can be going forward. Clearly, premium afforded this currency has significantly deflated; but the Fed may still keep to its forecast of a third hike before the end of the year if inflation materializes. That said, the US CPI figure for August is due today. That economic boost is needed if the tentative EUR/USD break below 1.19 - a move that took out a medium-term trendline support - can evolve into a true reversal.
Registering higher on the monetary policy impact scale is the upcoming Bank of England rate decision. While this meeting is highly unlikely to end with an actual change in the benchmark rate or its unorthodox stimulus program, speculation has been significantly leveraged heading into the event following the CPI readings earlier this week. An inflation reading near the top of the BoE's tolerance band gives justification to tighten if the MPC wants it. The market is clearly seeing a possibility that a hike may be in the near future with strong rallies for the Sterling with pairs like GBP/USD, EUR/GBP and GBP/JPY. I have preferences for which pairs would be better for dovish or hawkish outcomes and you should as well. Meanwhile, the cryptocurrency space (Bitcoin, Ethereum, Ripple) have started to put serious pressure on increasingly familiar technical patterns which points to the presence of a dominant market participant. And, in commodities, gold has extended its retreat while oil may be on the cusp of a bullish break. We discuss all of this in today's Trading Video.
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