S&P 500 Avoids its Break, EURUSD Maintains Its Pressure
EURUSD Talking Points:
- Global PMIs start the week off with a mixed perspective on recession worries and capital market performance
- ECB President Draghi says he doesn't believe the Euro is too low, but President Trump may dispute that
- Themes like trade wars should keep our focus on USDCNH and AUDUSD, but key event risk makes more potent risk for Pound, Kiwi and Dollar
See how retail traders are positioning in the Dollar pairs, US indices, broader FX pairs, gold and oil intraday using the DailyFX-IG speculative positioning data on the sentiment page.
Principal Themes Shift from Monetary Policy to Recession Fears
This past week, the principal focus for the global capital market was overtly the state of monetary policy - both its standing with supporting global growth and the troubling sense that its effectiveness was steadily deteriorating. The question of whether the sentiment can compensate for a real-world tepid pace of economic expansion through the artificial support provided by the already-taxed major central banks will remain a principal concern when it comes to market stability. The ECB President, Mario Draghi, already weighed in on domestic and global policy to start the week as did a few Fed officials. As the week wears on, we are due updates from the leaders of the Japanese, Australian, UK and Eurozone (again) central banks. While there will be considerable interest in what these leaders intend for domestic policy moving forward, the topic of effectiveness through their efforts should remain our principal concern if our primary interest in market bearing - which it should be for all traders.
For the time being, however, we start this new week off with a temporary change in top concern to hone in on the health of global growth. Generally, the potential for market impact via this theme holds limited positive potential. A sudden swell in expansion is very unlikely given the slow tempo of change on this scale and the numerous hurdles to recharging an already-stretched, decade-long expansion. Instead, the potential is further flagging in growth (a risk voiced by the Fed's Bullard again Monday) and the consequences that brings with a market still heavily skewed towards optimism. A global run of September PMIs offered mixed bag on this perspective. The US composite reading rose to 51.0 from 50.7 but services fell short of the upswing economists forecasted. Australian numbers were overall favorable, but the Eurozone's figures were conversely universally poor with the Eurozone's manufacturing report in particular dropping to 45.6 (anything below 50.0 is contraction) on an acute drop for German factory output. Keep tabs on sentiment surveys, headlines raising 'recession' search among browsers and the more prominent market-favorite Treasury yield curve.
The ECB President's Take on the Euro Draws Attention to Trade War Crossover
One of the more multi-faceted event risks this past session would come through EURUSD, though the immediate market charge wasn't particularly extreme. European Central Bank (ECB) President Mario Draghi was speaking before Europe's Parliament and the topics varied. The market's principal interests in this out-going central bank leaders' views was generally aligned to intent in the renewed drive in dovish monetary policy. He would suggest that stimulus would end when the reversal wouldn't cause economic damage. That seems arbitrary. More remarkable was the insinuation - made before - that further stimulus would provide diminishing returns. This question of effectiveness is a critical one to maintaining stability, and nowhere is is more crucial to maintain conviction than at the most extreme points of the policy spectrum.
Another remark delivered by Draghi was that he did not believe that the current level of the Euro was 'too low', but rather that it suited economic conditions. Given the economic struggles for the region, that is not far off basis. It has better earned the central bank's accommodation than a number of other key policy groups. As much justification as can be roused by the ECB to back its position however, the reasoning will not likely sway US President Donald Trump who has called out currency manipulation over the past months. On an equally-weighted Euro index, the currency is still above the middle of its previous multi-year range, but for EURUSD specifically, it stands near multi-year lows and risks fast tracking to levels not seen during the extreme risk aversion of the Great Financial Crisis. With trade was wearing on US economic health and the President pressured by souring sentiment surveys, it should come as little surprise that he is taking issue with this benchmark exchange rate.
Chart of Equally-Weighted Euro Index (Weekly)
Chart Created on Tradingview Platform
Watch for Pound, New Zealand Dollar and Greenback Catalysts
If you are looking for less systemic but more potent fundamental potential moving forward, there are three currencies that deserve a closer look. In chronological order, the Sterling is facing an important - or at least the most recent - milestone in the ongoing proceedings of the winding Brexit road. Prime Minister Boris Johnson was giving another update this past session with a rejection of a Northern Ireland backstop against EU pressure and making an effort to woo US President Trump in a bid to secure favorable US relations for the future. The news that truly seized my attention though were reports that the Supreme Court would determine the legality of the five-week suspension of Parliament by Johnson by Tuesday 10:30 AM London time. Stay tuned for that event. Implied Sterling volatility has already shot higher in anticipation.
Chart of GBPUSD and CBOE’s Pound Volatility Index (Daily)
Chart Created on Tradingview Platform
Another currency to keep a close eye on for scheduled updates is the New Zealand Dollar. The RBNZ rate decision is a critical update for the 'major currency' Wednesday morning. This is a currency considered on the same level as the likes of the Greenback, Euro and Pound even though its representative economy is substantially smaller. That participation can largely be attributed to its role as a 'dividend currency' amongst the majors. That position is in jeopardy however as the local central bank warns further easing could be on tap and even the notion of unorthodox policy is not out of the question. A systemic reduction in the currency's appeal could lead to the systemic trend shifts threatened by the likes of the NZDUSD, EURNZD and AUDNZD via technicals.
Chart of NZDUSD (Daily)
Chart Created on Tradingview Platform
Finally, the Greenback has its own short-term opportunity to break up the systemic cross trends of Fed policy, safe haven appeal and the central role it plays in the trade war. This past session's Markit PMI figures were favorable as was the Chicago Fed's national activity index (flipping positive to 0.1 from -0.41 the month before). Tuesday, the Conference Board's consumer confidence survey will be a less direct measure of this economic pace perspective; but ultimately, it represents the most important measure of health: the perspective of the US consumer. This survey has helped foster a counter-data optimism already present in speculative appetites. If this backstop falters, it will be increasingly difficult to hold back the perspective of tangible throttling. I am watching for a Dollar break, but remain dubious of intent for true trend.
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