Dollar, EURUSD and Dow Talking Points:
- Liquidity and seasonality are relentless forces for the markets as the approach of holiday trade rushes on while anticipation for Wednesday event risk takes immediate focus
- While the December PMIs likely hold greater influence over the systemic outlook, the Fed decision is likely top event risk this week
- My expectations for the Dow and risk trends is limited between liquidity and event risk but the relative perspective for the likes of EURUSD is still loaded
Risk Trends Staged for Volatility but Trend Is a Shot in the Dark
After a swoon to start the week, speculative trends firmed through this past session. That puts benchmarks like the S&P 500 and Dow Jones Industrial Average in easy reach of their respective record highs. Other measures of risk appetite like carry trade, junk bonds, growth commodities and global indices are in much the same position – though not scraping the same storied highs. This creates something of a technical magnetism, but it certainly doesn’t promise the ready development of a systemic trend. Remember that as we wade through the last of the truly systemic event risk of 2020 Wednesday. While I remain on watch for systemic issues like fiscal stimulus, vaccinations, post Brexit negotiations and a host of other issues; the most practical fundamental spark ahead is the combination of the GDP-equivalent, December PMIs and the Fed’s last rate decision (complete with economic forecasts) for the year. Is there potential here for more than just a last minute volatility adjustment?
Chart of Dow Jones Industrial Average with 20 and 200-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
The hurdle for gaining clear traction on general risk trends across the financial system is the expectations set for the coming two weeks. After this week closes, we will enter explicit holiday trading conditions with a Christmas shortened week starting on December 21st while the subsequent period beginning December 28th will include a more universal New Years drain. That is a serious curb to expectations for volatility and trend through the medium term. While such expectations suit volatility and volume seasonality studies for the month of December, performance metrics in the S&P 500 aren’t exactly on pace at the moment. In the Fed Wednesday ahead, we could make or break these traditional assumptions.
Chart of S&P 500 and VIX Seasonal Performance by Month Back to 1980
Chart Created by John Kicklighter with Data from Bloomberg Terminal
This Week’s Top Event Risk: The FOMC Decision and PMIs
While there is still a range of scheduled event risk across the globe for the final two trading days this week and into the next two weeks, there isn’t anything that I would consider to have the full impact of the combination of event risk this coming session. Between the FOMC (Federal Open Market Committee) rate decision and the developed world December PMIs, I would consider the latter far more potent scheduled event risk. For one thing, it is global in nature and prone to greater surprise against forecasts. What’s more, the connection to risk trends via the health of the global economy is more direct. That said, the spread out nature of the data’s release will likely dampen its ultimate market impact. Further, the disparity of the trends will likely lend more amplitude to relative measures of value like EURUSD or AUDJPY than systemic measures of risk trends.
Chart of Developed World PMIs (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg Terminal
Meanwhile, the Federal Reserve is likely on a fairly straightforward course given the circumstances. Fed fund futures are pricing in a 100 percent probability that the group holds its bearing with a target range of zero to 0.25 percent in this last meeting of the year. I have no reason to doubt those projections. However, the outlook is up for debate. Expectations for growth and effectiveness of monetary policy will factor into the group’s projections, which is important given that this is one of the ‘quarterly meetings’ which will include forecasts for rates, growth and other important metrics. If that outlook for 2021 and 2022 changes, beware the market’s interests.
FOMC Rate Decision Scenario Table
Table Created by John Kicklighter
The Top Two Majors in Line for a Convergence of Technicals and Fundamentals: EURUSD and GBPUSD
For market impact, I am looking for volatility but not meaningful trend. The later requires a viable liquidity to develop follow through which simply seem impractical given the conditions over the next two weeks. That said, shallow markets and high-grade event risk is virtually the primary ingredients of meaningful short-term market movement. For exposed markets, I am keeping close tabs on the Dollar pairs given the source of the data with the most systemic reach. Considering EURUSD and its 1.2150 overhead – which is the historical range’s midpoint – I asked traders whether they though we could clear (close more than 100 pips above) that boundary before the year ends. The majority believe that is possible, so let’s see what is in store for the next 24 hours.
Twitter Poll on Whether EURUSD Will ‘Break’ 1.2150 Before Year End
Poll from Twitter.com, @JohnKicklighter
For a shorter time frame, the daily chart offers up a coiled spring for a chart. The 9-day range (a time frame determined by the actual congestion formed since stalling out at 1.2150 at the beginning of the month) from EURUSD is the smallest trading channel in over 12 months. That is a volatility risk as any errant, high-profile event can potential charge enough of a move to breach congestion. There is enough fundamental powder to make this happen, but follow through remains a very dubious notion. If we cannot even tentatively clear the tight range, beware the sharp drop in speculative interest.
| Change in | Longs | Shorts | OI |
| Daily | 5% | 2% | 4% |
| Weekly | 4% | -14% | -2% |
Chart of the EURUSD with 20 and 200 day Moving Averages with 9-Day Range (Daily)
Chart Created on Tradingview Platform
While there are numerous other Dollar-based majors worth watching over the coming 24 hours with the event risk on hand, I am keeping a closer tab on GBPUSD. That is due to the influence of the Sterling counterpart. The post Brexit trade discussions have more than captured traders’ attention this week, it has generated enormous volatility – just not follow through. Strike the proper combination of influences, and perhaps we can overtake 1.3500 or slide below 1.3200. I am keeping an open mind but don’t expect more from Cable than I do Fiber (EURUSD).
| Change in | Longs | Shorts | OI |
| Daily | -1% | 5% | 1% |
| Weekly | 6% | -10% | 2% |
Chart of the GBPUSD with 50 and 200-Day Moving Avgs, Daily Gaps and 1-Day ROC (Daily)
Chart Created on Tradingview Platform
I will again point out that most traders that participated in my poll asking what would happen to GBPUSD after the UK-EU trade talks passed the imposed deadline with a ‘no deal’ outcome, and the vast majority expected further significant discount. Well, we are on pace for no tangible agreement by January 1st and yet the pair has held up. How does that change the dynamic of expectations moving forward?
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
Learn how central banks influence the currency markets in our DailyFX education series.
.
