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Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar's extraordinary volatility - and unconvincing stabilization - dominated the fundamental discuss this past week
  • Ahead, both the economic docket and thematic spectrum will focus on the US between Fed policy, growth and protectionism
  • Other event risk to monitor includes: Eurozone GDP, the EU's Brexit discussion and Australia CPI

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Common Momentum in Key Trends

There have been two remarkable trends to define this past week - and truly they are moves that have defined the capital markets for much longer than that. US equities have led the charge higher on a risk appetite trend that is nearly a decade old. And, just as intense lately has been the Dollar's tumble over a period of 13 months that has seen majors like EUR/USD, GBP/USD and others recover from the previous phases remarkable, one-sided drives. Both of these trends have run counter to the traditional fundamental interpretation of value, but they have nevertheless been unswayed from their path and have redefined what fundamental themes define our markets. The question is how long the S&P 500 climb and US Dollar dive will continue or whether they are even at risk of temporary course correction.

Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

Both SPX and Dollar Will Focus on Same Event Risk

Top event risk over the coming week is dense, but there is an inordinate concentration of critical fodder when it comes to the United States. Regardless of US capital market benchmarks that have paced the global risk chase or the currency that has suffered at the hands of the sudden resurgence of its counterparts, the theme of US protectionism will be critical. This past week, the Trump administration loudly championed steps towards an unmistakable policy stance that looks to benefit at the detriment of its global peers. The introduction of tariffs on China, the Commerce Secretary's warning that a trade war was already underway and the Treasury Secretary's talking down the US Dollar all lead to the same outcome: protectionism. We will see whether this is a policy the government sticks to or flips on in the week ahead with President Trump's fist State of the Union Address.

Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

More for the Dollar

Protectionism isn't the only theme on the agenda in the week ahead - though it can easily override. Monetary policy will be on the menu for the Dollar this coming week. Most prominent is the Federal Reserve's rate decision. Fed Fund futures are only pricing in a 3 percent chance that a hike will come out of this particular meeting. Instead, the market will look for language to suggest the group will be preparing for three hikes through the year - perhaps even four. More productive on this speculation front though may be Monday's PCE deflator (the Fed's favored inflation reading) or Friday's NFPs and wage growth data.

Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

Other High Profile Event Risk to Track

The Dollar will not be the only moving piece on the chessboard in the week ahead. Where the ECB decision is behind the Euro, we have Eurozone 4Q GDP, the region's inflation and employment data ahead. For the Pound, the EU 27's ministers are meeting to discuss their Brexit directive with further negotiations ahead. An event risk that perhaps is not on the same scale but can lead to 'shock' volatility much like the New Zealand Dollar experienced this past week is the Australian 4Q CPI update. A drop in the RBNZ and ECB rate forecast has had a material impact on their respective currencies, it would be no surprise to see the same for the Aussie Dollar. Even outside scheduled event risk, we should monitor remarkable price developments. Various Yen crosses are moving with key techncial levels, the Swiss Franc has rallied across the board with key breaks, Gold needs to make something of a key bullish technical break and cryptocurrencies are registering rapidly fading volatility despite fresh news of hacks. We discuss all of this and more in this weekend Trading Video.

Dollar and Equities to Focus on US Protectionism over Fed Policy Next Week

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