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EURUSD, Dow and Gold: Markets Trading Into the FOMC

EURUSD, Dow and Gold: Markets Trading Into the FOMC

John Kicklighter, Chief Strategist

EURUSD, Dow and Gold Talking Points:

  • Risk-sensitive benchmarks eased back from their charge this past session with very few exceptions – including the ever-charged Nasdaq 100
  • Top event risk ahead is the FOMC rate decision which has been shaped by exceptional accommodation in previous months and even the ECB’s added stimulus last week
  • The Dollar has dropped 11 of the past 12 trading days, the Dow broke a six-day rally and gold holds stubbornly within reach of multi-year highs

Risk Trends Take a Break but Not for Self-Reflection

The market leaders of speculative appetite I follow were showing a rare – at least recently – collective step back this past session. Aligned movements in such disparate assets as global indices, carry trade and emerging markets is often indicative of an underlying shift in investor sentiment. Yet, actions do not always speak to intentions. I would say that the ebb is deserved given the charge against a backdrop of unconvincing growth, dependency in temporary support measures and astounding rise in market prices. However, ‘self-reflection’ didn’t seem to be at the root of the market’s pause. Rather, it seems the anticipation of Wednesday’s FOMC (Federal Open Market Committee) meeting has led to some understandable reticence.

Wall Street Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 0% 0% 0%
Weekly 34% 2% 9%
What does it mean for price action?
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Chart of the Dow Index with 200 Moving Average and Consecutive Day Moves (Daily Chart)

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Chart Created on Tradingview Platform

Despite the recognition of potential risk ahead, the air of speculative indulgence wasn’t fully quitted. Perhaps the most prominent example of that quiet creep higher in sentiment was from the Nasdaq 100. The tech-heavy index advanced to a record high for the third consecutive trading session. To give reference to this type of FOMO (fear of missing out) mentality, the relative advance of this particular high-flyer compared to a more expansive measure like the VEU ‘rest of world’ equity ETF reinforces an appetite for momentum backed by a thin veneer of justification such as revenue protection during lockdown.

Chart of Nasdaq 100 Overlaid with the Nasdaq to VEU ‘Rest of World’ ETF Ratio (Daily)

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Chart Created on Tradingview Platform

The Fundamentals That Really Matter

At present, there are a host of systemic uncertainties at hand. While some say the recession is accounted for, we have only recently (Monday) seen the NBER determine the US economy tipped into an official recession in February while the Atlanta Fed’s model recalibrate its 2Q GDP forecast to -48.7% - not much of an improvement from the previous -53.8% assessment. Further, the focus on the reopening of economies from the coronavirus lockdown has encouraged a wide range of expectations and considerations of a possible second wave. Then there are the geopolitical issues that are somewhat undercut by being abstract. Protests in the US may seem divorced from an economic influence (they aren’t) but the charge building behind trade wars has the ‘benefit’ of the past two years’ experience for potential fallout. So long as these issues persist, we will come back to their prominence. But for now, all attention is on the Fed.

Twitter Poll of Second Wave of Pandemic

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Poll from Twitter, @johnkicklighter

Monetary policy as a structural theme for global risk appetite plays a crucial foundation for the persistent bullish interest. Clear recession and enormous uncertainties present exceptional threat to markets and investors. Optimism has to be found in forward-looking and equally-abstract measure, which can only truly be met by stimulus. The past months have seen the Fed rapidly cut rates and introduce further unorthodox accommodation measures. Just yesterday, the group further expanded its ‘Main Street’ program. And, the influence is not just a linear assessment of the FOMC. The ECB’s upgrade last week may inadvertently raise the expectation for even more.

Scenario Table for FOMC Decision and Accompanying Measures

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Graph Created by John Kicklighter

For the particulars of the upcoming top event, there are a few layers to this meeting. First and foremost, the consensus is for the Fed not to change rates. However, Fed Funds futures seem to indicate a 15 percent probability of a 25bp rate hike. This is more likely a factor of the contracts rather than a genuine expectation among market participants. The possibility of further stimulus is a more active debate from my view. Given the frequency of updates on this front, it could very well be a formal program or even reference in the policy statement. Beyond that, we venture into the quarterly Summary of Economic Projections or SEP. Updates of forecast for interest rates and growth will be watched closely, but the market may follow its habits of discounting the experts’ opinions. Chairman Powell’s press conference 30 minutes later will of course be its own importance, but his ability to walk the line to defuse volatility should not be underestimated.

The Markets to Watch as the FOMC Deliberates

For markets to watch during the Fed announcement, those clearly linked to risk trends are my top priority. The Dow, S&P 500 and Nasdaq will be well positioned and navigating liquid afternoon hours when the news hits the wires. How we end the day and further carry sentiment through Thursday’s Asia, Europe and early US sessions will be an important litmus test for me. Aside from the overt risk measures, the Dollar will be a critical market to gauge response given it has dropped 11 of the past 12 trading days. The benchmark EURUSD shows much the same short-term momentum with the pair currently pressuring technical resistance on higher time frames like the weekly.

EUR/USD Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 0% 0% 0%
Weekly -4% 17% 8%
What does it mean for price action?
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Chart of EURUSD (Weekly)

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Chart Created on Tradingview Platform

Another important market to watch is gold. This is more of a reflection on monetary policy at-large rather than statement on the Fed itself. It is still telling for me that this ‘safe haven’ is holding fast to multi-year highs despite the overtly risk-leaning assets pushing highs of their own. There is a notable correlation between the precious metal and the scale of monetary policy which can be seen when overlaying the precious metal with central bank balance sheets or measures like the Fed Funds futures. If the commodity takes off or collapses – either in concert or contrast to other assets – it could suggest much.

Chart of Gold Overlaid with December 2021 Fed Funds Futures Contract Value (Daily)

EURUSD, Dow and Gold: Markets Trading Into the FOMC

Chart Created on Tradingview Platform

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