GBPUSD, Pound, Dollar, S&P 500 Talking Points:
- Risk trends opened the week with a serious impression of indecision as the S&P 500 produced an ‘inside day’ though a Nasdaq bid reflected appetites
- GBPUSD was a top FX benchmark to open this week with extraordinary volatility printing some of the largest ‘wicks’ or ‘tails’ since previous ‘Brexit’ key dates
- While the Sterling contemplates UK trade issues, the Dollar has been just as volatility against a backdrop of stimulus speculation
Another Risk Trends Start That Falls Short of Disarming Speculation
We ended last week with an unmistakable swell in risk appetite. Some of my favorite, imperfect measures of speculative appetite, the major US indices – Dow, S&P 500, Nasdaq and Russell 2000 – simultaneously closed out Friday at record highs for the first time in nearly three years. While we didn’t meaningfully pull off this underlying drive, some of the acceleration had certainly ebbed to start the new trading week. As stimulus hopes wobbled, vaccine expectations settled and trade relations (particularly in Europe) came under scrutiny; the S&P 500 led with a pattern technical traders would recognize: an ‘inside day’.
Chart of the S&P 500 with 1-Day Historical Range (Daily)
Chart Created on Tradingview Platform
Looking across the spectrum, the traction in speculative appetite was uniformly knocked off pace. Global indices from the FTSE 100 to German DAX to Japanese Nikkei 225 were struggling with some measure of retracement. Emerging market performance from EEM to currencies like USDMXN struggled for high return appeal. Further, the performance of growth commodities (ie copper and crude oil), junk bonds and carry trade would all fall under the same spell of uncertainty. Yet, as uneven as this picture was, it was still worth noting a point of familiar speculative momentum: the relative charge of the tech-heavy Nasdaq relative to a broader benchmark like the S&P 500 or Dow. This is a gauge to suggest where risk trends are concerned, there remains an appetite for the established performers (momentum) rather than an effort to seek ‘discount’ which is more common in a my systemic speculative advance.
Chart of Nasdaq 100 to S&P 500 Ratio (Daily)
Chart Created on Tradingview Platform
The Global Fundamental Themes Still In Play
We only have a few weeks of full market liquidity ahead of us before the holiday conditions start to seriously draw down on activity. It is likely that we are already seeing this anticipation drag on markets, but there remain unmistakable fundamental issues that keeping the volatility engine turning. One such theme with a universal tag but exerting more weight in the US for the immediate time being is the discussion of stimulus. While the Fed’s efforts are important and generating serious concern with the ECB rate decision expected to generate a fresh infusion of external capital later this week, the world’s largest economy and currency continue to wrestle with the uncertainty of the a follow up fiscal stimulus. It was reported that the Senator Majority Leader and Trump Administration could back a stimulus program to move along the much needed follow up to the expired (in late July) CARES Act. How much is this already expected and thereby discounted? That question will soon be answered.
Chart of Major Central Bank Stimulus (Monthly)
Chart Created by John Kicklighter
Where the Dollar’s volatility around stimulus talk was producing some interesting technical struggle among its crosses – such as EURUSD tentatively retreating from its historical midpoint around 1.2150, another more headline-heavy event seemed to take top spot. Brexit proceedings have essentially become a part of the global macro backdrop such that the market has grown a callus against much of the headline fodder around this ongoing struggle. Yet, there remain key dates that can still generate a remarkable level of volatility. We hit such a milestone this past session when the United Kingdom and European Union negotiation teams failed to break the impasse to hammer out a clear deal for the end of year trade transition. The market took the realization poorly with the GBPUSD leading Sterling crosses to a sharp tumble; though that retreat was heavily retraced by session close as it was announced UK Prime Minister Johnson and European Commission President Ursula Von Der Leyen would meet in person “in the coming days” in an effort to break the deadlock.
| Change in | Longs | Shorts | OI |
| Daily | 16% | -11% | 7% |
| Weekly | 7% | 0% | 5% |
Chart of the GBPUSD with Daily Wicks (Daily)
Chart Created on Tradingview Platform
Sterling Shows It Is Still Volatility Prone Despite a Familiarity with Its Brexit Struggles
Cable wasn’t the only Pound-based major where the sting of volatility could be recognized. The headlines this past session left the impression of concern across the field of GBP crosses. GBPUSD is interesting on a technical basis for its reference to 1.3500 as a multi-year range high, but it is hardly alone in standing out for its chart-based inflection. I’d point out GBPAUD and GBPNZD for remarkable volatility of their own while even EURGBP – which theoretically finds two currencies at risk for the same event – was even aligning to a traditional Pound response. Yet, the most appealing of the pairs to me was GBPJPY which has immediate technical guidelines to follow in trendline and Fib resistance above at 140, but it also supports a broader range which seems to more practical terrain in these final weeks of 2020.
Chart of the GBPJPY Overlaid with Equal-Weighted Pound Index (Daily)
Chart Created on Tradingview Platform
A question on my mind given this fundamental push back against the seasonal drawdown on activity is how much more intensity could come above owing to this Brexit uncertainty. We have had over four years to acclimate to this fundamental course and the markets have certainly hardened to much of the day-to-day anticipation for key dates. Nevertheless, activity like we have seen this past session remind us that this is not fully accounted for when volatility is at stake. We have an undefined amount of time (though likely just a few days) for which a last minute deal could be struck between European and British leadership, but what happens if we confirm that talks have fully broken down? How far could the Pound further retreat given this has been a scenario in the spectrum for as long as the Brexit was raised? According to my poll results, many believe the markets could drop much further in the event that negotiations fail. I, on the other hand, think that after an initial jolt of surprise, the market wouldn’t likely lose too much altitude before regaining traction.
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
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