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Dow and Dollar Climb Sputters, Pound and Oil Moves Look for Motivation

Dow and Dollar Climb Sputters, Pound and Oil Moves Look for Motivation

John Kicklighter, Chief Strategist

Talking Points:

  • Two days in and the pause on the US-China trade war run up can hardly be registered in risk trends or the Dollar and Yuan
  • Dollar's ascent is slowing with EUR/USD, GBP/USD and USD/JPY moving to phase 2 while USD/CHF, AUD/USD and NZD/USD near turns
  • Event risk for the Euro, Pound and Aussie dollar can achieve very different results for market movement.

See how retail traders are positioning in EUR/USD, GBP/USD, USD/JPY and other major assets intraday using the DailyFX speculative positioning data on the sentiment page.

Day Two and Little Sign of US-China Trade Enthusiasm in Risk

At what point do we abandon expectations for a sentiment swell to arise from this past weekend's news that US and Chinese authorities have capped the escalation of trade wars between the two countries? Monday, risk-oriented assets like equity indices posted a bullish gap and a modest stretch higher. This past session, that restrained enthusiasm seemed to evaporate. The Dow managed another positive jump on the open, but the follow through was shallow and ended quickly before the market turned to close the day lower. If we were to attribute this lethargy to the fact that it was a blue chip benchmark, the tech-heavy Nasdaq Composite did the same while the FAANG (Facebook, Apple, Amazon, Netflix, Google) aggregate refuses to post a new record high even though it stands just off of its double top. Skepticism over the general health of trade - and specifically between the US and China - remains without details from these two countries and the general course of protectionism the world retains. Carry, junk bonds and emerging markets are still struggling for the raw appetite for speculative momentum; and that may remain our greatest hurdle: the inability to revive the complacency-backed 'reach for yield'.

Dollar's Struggle Comes at a Technically and Fundamentally Inconvenient Time

The Dollar's struggle to sustain its climb is growing more apparent for chart watchers. The DXY Dollar Index is struggling just below the first major Fib level of its slide through 2017, but this particular milestone doesn't carry much heft in itself. When there is an extreme dearth of conviction - or momentum in the technical sense - even minor levels can seem impregnable. Among the most liquid Dollar-based crosses, a new wind is crucial as we are attempting to forge the next critical stage for a bull trend whose fundamental moorings were never really established. EUR/USD is facing a confluence of support around 1.1700, GBP/USD is trying to catch traction after slipping 1.3450 and USD/JPY is looking towards a far more important trendline resistance falling around 112 after an impressive run. If this move stalls and the currency lingers, it can drain the trade potential for those pairs; but it can also offer a chance for a more motivated recovery from counterparts such as USD/CHF, AUD/USD and NZD/USD. Ahead, we have some standard fundamental fear in the May PMI activity reports (economic activity) and FOMC minutes (monetary policy). That said, I'm dubious of either securing any meaningful conviction.

Event Risk and Reactions for the Euro and Pound May Vary

Compared to the last 24 hours drought of meaningful fundamental developments, the upcoming session's calendar looks like a deluge. That would only be a relative assessment however. The scheduled event risk on tap is certainly a step up for volatility potential; but it is far from the cannon fodder for which we have seen prominent trends develop through these past few months. The most explicit event risk between this past session and the next was from the Pound's docket. This past session BoE officials including Governor Carney testified before Parliament and there was an effort to ward off calls that the policy authority should be more explicit in its interest rate forecasts as well Mark Carney's familiar lament of the economic toll that Brexit has exerted on the UK economy already (900 pounds per household and a 1 percent point short fall of the May 2016 GDP forecast according to his accounting). A silver lining was MPC member Vlieghe's belief that the BoE will realize more hikes than the market is pricing in, but this is a known hawk. We will have a more definitive monetary policy assessment offered up today in the April inflation statistics. For the Euro, there is both underlying theme in the form of an Italian coalition government that is reinforcing its anti-EU and anti-Euro views. This is an open-ended risk, but the data on tap can provide some relief at least in the form of a specific time and definitive view for the region. The Eurozone PMIs and consumer confidence sentiment surveys will certainly register, just not so readily for volatility.

Keeping Track of the Technical Moves: Aussie, Kiwi, Franc

We have been following the slow technical turns setting up for some of the less prominent currencies in the FX market. As Australian Dollar has issued a tentative but broad recovery over the past two or three trading days after a month's long slide. The New Zealand Dollar is so far unconvincing with its effort to recover from a far more painful slide amplified by the RBNZ's admission that it could very well cut rates again. And then there is the Swiss Franc's remarkably stretched decline promoted and sustained through EUR/CHF. The technical cues are certainly encouraging, but the fundamentals are flimsy. For pure technicians, that isn't a problem; but I look for motivation in fundamentals to build a conviction that a trade can build even when faced with minor chart or calendar bumps along the way. Speculative motivation is still the most profound driver I see in the Dollar, so there can still be trade opportunity to find in these developments, but match your exposure to your conviction. I'll keep watching AUD/USD, AUD/CAD, GBP/AUD, NZD/CAD, NZD/USD, EUR/CHF and CAD/CHF. We discuss all of this and more in today's Trading Video.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.