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Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

2018-02-01 01:26:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The State of the Union and Fed decision would feed neither protectionism nor monetary policy themes for Dollar and risk assets
  • A hold by the Fed hasn't tempered the forecast for Fed rates through 2018 - over 60% chance of 3 hikes and 25% for 4
  • AUD/USD, NZD/USD and USD/JPY ranges look more appealing ahead of NFPs while Bitcoin and Oil trends may be tough to stall

What are the DailyFX analysts' forecasts for Global equities, the Dollar, Euro, Pound, commodities and more? What are their top trade ideas for 2018? Sign up for the guides on the DailyFX Trading Guides page.

A Fundamental Storm Bypass

The past 24 hours threatened to draw a confluence of key fundamental themes. The State of the Union was following a protectionist heave following the 'America First' agenda brought up last week in Davos by the Trump administration. The Federal Reserve rate decision was the most effective vehicle for an injection of monetary policy speculation for the world's most hawkish major central bank. And, risk trends are second wobbling domino in the chain awaiting a catalyst whether that entail the spark from the previous two mentioned catalysts or simply a self-sustaining momentum from the S&P 500's painful drop on Tuesday. Yet, none of these themes took up the bears' rally cry...so far. All three are complex fundamental states and there will be plenty more catalysts in the future. We still have a critical technical break on US equity indexes and the VIX to deal with as well as NFPs due later in the week. Do not indulge complacency.

S&P 500 Index

Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

S&P 500 Monthly

Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

Dollar Without the Catalysts

Without the anticipation of the Fed decision or the State of the Union, how would we evaluate the Greenback's backdrop? If we dealt strictly in weekly or monthly charts, perhaps we could make an argument that it is still somewhat richly valued (overbought), but that would be a stretch. Without a distinct and sizable fundamental thrust, natural follow through on the already steep selloff over the past year would be ambitious to presume. Even after the break of the ICE Dollar Index's head-and-shoulders pattern, there needs to be some charge to carry bearish motivation against steady growth, a hawkish Fed and political policy that would at-least initially favor the US. In this mix, it is more likely that we either continue to consolidate or follow a path of least resistance. The latter scenario would likely favor a bullish break as stretched bearish interests look to book profit. For that reason and technical picture, I prefer pairs like AUD/USD, NZD/USD and USD/JPY over EUR/USD or GBP/USD.

Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

The Gravity of NFPs versus Impact of Aussie CPI

While the densest field of scheduled and thematic event risk for the week may be behind us now, we are not without spark through week's end. Come Friday, we still have the US change in nonfarm payrolls (NFPs); which is historically a capable market mover. However, given the market's resistance to reviving overt monetary policy discrepancy and the high bar for defining risk trends; it is unlikely that the market will be too vested in a wait-and-see for the indicator. Contrast the lack of the potential for payrolls to the meaningful response from the Aussie Dollar to its own 4Q CPI reading this past session. Though a modest miss, it undermined RBA rate forecasts even further and caught pairs like AUD/USD at the top of a range in a bind.

AUD/USD

Dollar and S&P 500 Undetonated Ordnance After Fed, State of the Union

Lack of Motivation for Oil and Cryptocurrency

There is equally a lack of motivation on the fundamental side for the likes of commodities and cryptocurrencies, which may allow for trends to persist rather than prevent them as in the case of equities and FX. From crude, news that US production had surpassed 10 million barrels for the first time in decades seems to add pressure to the supply glut that held the market down over the past years, but the news left the commodity unfazed this past session. And, for Bitcoin and company, there seems a deemphesizing of good news and a commitment to the bad. South Korea seems to be backing away from its ban threat, but it is the Facebook ad ban and CFTC's investigation into Tether that still holds traders’' concerns. If there is going to be a fast tracked renaissance for this recently troubled asset class, it needs new funds from its mainly millennium investor pool. Tough to achieve that when there is fear over stability and you can effectively market to fresh capital. We discuss all of this and more in today's Trading Video.

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