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Talking Points:

  • Reports that US and Chinese officials may restart talks earned far more speculative response than it deserved
  • The Fed's policy skew remarkably grows more hawkish as one of its most prominent doves voices support for further hikes
  • Top event risk Thursday is the back to back release of the ECB and BoE rate decisions

See how retail traders are positioning in EURUSD, GBPUSD, and the rest of the FX majors, global indices, gold and oil intraday usingthe DailyFX speculative positioning data on the sentiment page.

The Bare Minimum in Reversing Trade Wars

There was a notable improvement in market sentiment - and in particular assets directly influenced by trade wars - this past session in response to reports that the US and China could return to the negotiation table for trade talks. The impact was acute for the likes of the USDCNH (impressive the contrast to news of conditions worsening) and the AUDUSD. I consider the Australian Dollar and AUDUSD specifically good proxies for the status of these two behemoths' ongoing trade fight owing to the absence of curbs that can distort the signal. Yet, the influence didn't stop with the markets in the immediate sphere of influence. There was a notable boost in performance from more stalwart but definitive 'risk' benchmarks like the US indices. That boost however did not escalate to genuine enthusiasm. Merely agreeing to speak on trade is the bare minimum to be done in order to pull these countries out of economic confrontation. We have seen them attempt to revive talks recently only to see the effort yield no tangible return. A more encouraging - yet unconfirmed - report was that the Trump administration may delay the implementation of the $200 billion tariff escalation against China in part owing to Hurricane Florence's imminent landfall. Meanwhile, the recent build up in optimism surrounding the possibility of a breakthrough in NAFTA talks between the US and Canada has cooled without measureable progress and Canadian Prime Minister's reiteration that no deal would be better than a bad one.

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A Tepid Mix of Risk Appetite Seeking Genuine Motivation

Fundamentally, there was little to provide tangible traction for speculators to channel a bullish advance. While the hope dripped from headlines for the US-China talks, it was clear that the speculative rank has grown weary of placing its confidence in political breakthroughs from these ardent rivals. Elsewhere, the emerging market contagion fears have not found fuel to keep the fires of panic stoked and economic data has not altered the course of more traditional valuations. Monetary policy however may soon return to the forefront - for better or worse. And, given the general price-to-value levels of speculative benchmarks such as US indices and the years of dependency built into QE-earned stability, the negative implications that can arise out of this theme can be significant. Yet, for the time being, there is less-and-less a default to simply return to a passive bid built into complacency. That is likely do to the prominence and number of threats to general stability. Notably this past session, the EEM Emerging Market ETF, HYG high yield fixed income ETF and European indices earned the most sizable recoveries - they were some of the most depressed of the standards. Meanwhile, the S&P 500, Nasdaq, Dow and Yen crosses were little changed. Avoid being lulled into a false sense of security or sheer inactivity when it comes to the state of risk trends. The return to conviction is inevitable and its reach all consuming.

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Important ECB and BoE Rate Decisions - Even if They Have Little Hope to Hike

Monetary policy is still a crucial fundamental aspect of the financial system. It just hasn't been front and center with more active themes and explicit forecasts as of late. Whether central bank efforts trigger a systemic shift in the financial system or simply contribute to sentiment's unfolding owing to the dependency that has developed around years of stimulus, the scope of its influence should not be underestimated. We will tap into this fundamental current in the upcoming European trading session. The back-to-back release of the Bank of England (BoE) and European Central Bank (ECB) decisions will present very different threats and opportunities for their respective currencies. The United Kingdom's central bank has previously raised rates and there remains anticipation for further moves into the future. However, there is no change set for this meeting and there is no Quarterly Inflation report this go around to give more definitive support to speculation over timing. More important than the debate over whether the next rate hike will happen in the first or second quarter of 2019 is the uncertainty in Brexit. This event will tap into that concern, but the ultimate course on the UK's divorce from the EU depends very little on the central bank. The ECB's rate decision in contrast is not as burdened when it comes to competing themes. Then again, the central bank is still far from its first hike. That said, the Euro advanced throughout 2017 on the mere anticipation of a rate hike more than a year out. With this policy event, we are also due economic projections from the group which will certainly fuel speculation. There are Euro options for a bullish or bearish outcome, just don't expect reason and opportunity from EURGBP.

Monetary Policy Scale

Dollar Opens Itself to Counterparts and Themes Yet Realized

One potential net benefactor - at least for volatility - to the Euro and Pound-centric event risk is the world's most liquid currency: the US Dollar. In 2017, the climb from the Euro claimed a particular victim in the Greenback. The Brexit volatility inversely charged the US currency as a unique haven to an extreme risk. If the two central banks take distinctly dovish turns from their previous bearings, the Dollar may finally find the reprieve it has struggled to find lately. Short of that external influence, the primary reserve has its own fundamental considerations that have simply taken a backseat of late. Fed rate policy remains set to its peak hawkish policy through this current phase of monetary policy. Adding to the surprise support for rate hikes from Chicago Fed President Evans, an even more dovish permanent voter of the Governor Board Lael Brainard said further gradual hikes over the coming year or two and tightening above the long-term forecasts may be needed. That reinforces the highest hawkish setting for Fed hikes through June 2019 since the contract started trading and the highest general projected rate in over a decade. But is that enough to return the Dollar to the climb it was waylaid from last month? We discuss all of this and more in today's Trading Video.

Daily Chart of the DXY and Implied Yield from Fed Funds Futures

If you want to download my Manic-Crisis calendar, you can find the updated file here.