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EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

John Kicklighter, Chief Strategist

S&P 500, Bitcoin, Tesla and Dollar Talking Points:

  • My top ‘risk’ benchmarks continued to tread water with the Dow Jones Industrial Average and S&P 500 carving out unmistakably tight ranges
  • Meanwhile, risk appetite continued to stretch on reports of exceptional volume on penny stocks, a more than 50% jump in Gamestop shares and the Russell 2000 outperformance
  • Top event risk ahead is the expected Biden stimulus plan announcement – with both the Dow and EURUSD well placed for breaks, are expectations too inflated?

Risk Appetite Continues to Build Despite Dow Inertia

Some of the benchmarks for risk trends that I monitor most closely are building pressure as critical event risk closes in. That analysis may catch some off guard considering some of the most recognizable speculative pace-setters were essentially unmoved this past session. Among the US indices in fact, the Nasdaq 100 rose 0.6 percent while the S&P 500 gained 0.2 percent, though from a technical perspective, those investor favorites were effectively little changed as they failed to return to their respective highs. The index that stood out the most for its lack of commitment was the blue chip Dow which held an extremely narrow course such that it would carve out the smallest four-day trade period since January 23rd, 2020. This is a loaded ‘quiet’ considering it is unfolding at record highs. An event such as an update on stimulus from President-elect Job Biden due this session could find a very willing market for volatility.

Chart of Dow Jones Industrial Avergae with 4-Day Average True Range (Daily)

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Chart Created on Tradingview Platform

Despite the indecision reflected in the Dow’s restricted scale of activity and technical range, there remains an unmistakable buildup in risk appetite. While I’m still watching the likes of Tesla and Bitcoin as fade favorites – both of which bounced this past session – there is an even more exceptional corner of speculative drive to be highlighted. Consider the performance of penny stocks and some other low price/liquidity shares. It was reported by Bloomberg yesterday that a handful of stocks with an exceptionally low share price accounted for over 20 percent of turnover in volume at 2.6 billion shares. That is acute, leveraged trading appetite. While monitoring ‘pink sheet’ trading activity can give insight to the market’s penchant to seek return for return’s sake, the performance of the small cap Russell 2000 – particularly relative to the likes of the S&P 500 – can act as a reasonable proxy for the macro observer.

Chart of Russell 2000 Overlaid with Ratio of Russell 2000 to S&P 500 (Weekly)

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Chart Created on Tradingview Platform

Top Political Risk Magnet is Also the Top Technical Candidate for a Dollar Break: EURUSD

A proximity to multi-year or record highs makes for a burdened picture of restraint for the different markets that attempt to project such an indecision. Of course, that check is only as robust as the fundamental charge presents. The economic docket offers up some interesting event risk through the final 48 hours of this trading week to source breakout potential, but not every indicator or headline is imbued with the same level of influence. This past session’s US consumer inflation and Eurozone industrial production statistics for example would fail to generate a clear trend for EURUSD. With the historical midpoint of this most liquid currency cross (1.2150) at hand – and bookended by the 20-day moving average at 1.2225, I am watching vigilantly for effective market-moving event risk. Perhaps political event risk is worthy of focus. In the US, President Trump was impeached by the House of Representatives a second time while the persistent region of trouble Italy finds its government on the edge of collapse. I consider these sparks as improbable trend instigators, but that isn’t the only charge on hand.

Chart of EURUSD with 20-Day Moving Average (Daily)

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Chart Created on Tradingview Platform

Stimulus Winds are Changing in the US

As we move into Thursday’s session there remains a notable event risk with a distinct time frame and that fodder that is influential but lacks the convenience of a distinct time frame. In the former camp, we have the expected update from incoming US President Joe Biden on his plans for stimulus amid the pandemic. The US has struggled to issue fresh support after their CARES Act expired in late July despite the waver in economic activity registered by various data and forecasts. The new President with the backing of a Democratic Congress may attempt to overwhelm fears with a large effort that is estimated to be in the ‘trillions’. There is serious potential here, but I will also note that the market has priced in quite a bit of expectation. One way or the other, in my poll, those analyzing the Dollar seem to believe that a large planned support program would be a bearish influence to the US Dollar which would suit the prevailing EURUSD trend.

Twitter Poll for US Stimulus Program Supporting a Dollar Bullish or Bearish Outcome

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Poll from Twitter.com, @JohnKicklighter

While there is remarkable uncertainty in the plans of fiscal stimulus from the incoming US administration – including whether the President-elect can even secure the 60 votes necessary to secure a generous support package – the markets are nevertheless willing to cast significant influence to the event. Perhaps just as influential but lacking the same degree of unfulfilled upside hope is the interest in the Federal Reserve’s activities. Though presently on a very generous stimulus course, the world’s largest central bank is facing deep scrutiny with discussions for a ‘taper’ starting to gain serious traction. I will note that those of those that responded to my poll said that if the FOMC were to step back its support of the market, two thirds thought it posed a risk to the S&P 500 as a benchmark.

Twitter Poll Asking Whether Fed ‘Taper’ Will Prove Bullish or Bearish for the S&P 500

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Poll from Twitter.com, @JohnKicklighter

Beware the ‘Buy the Rumor’ Build Up In This Weighty Event Risk

While there are many that will attribute a blundering temperament to the world’s largest central bank, I will say that they seem keenly aware of their influence on the market. This past session, a range of Fed members were speaking and all of them made an effort to soothe speculation that a reversal in course was at hand. Only the constant-contrarian St Louis Fed President James Bullard was controversial as he suggested inflation was closer at hand than many expected. There seems little chance that the US central bank is close to the dreaded ‘taper’, but the market is so dependent on the external support at this point that the sensitivity may prove amplified.

Chart of S&P 500 and Fed Balance Sheet in Billions (Weekly)

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Chart Created by John Kicklighter with Data from Bloomberg Terminal and Fed’s Economic Database

As we monitor the impact of fundamental event risk with an unclear influence, it can be difficult to spot markets that will response with a particularly straightforward course. One of the most interesting pairs among the Dollar-based majors for me remains USDJPY. This cross has worked its way into a particularly loaded wedge pattern – with a tentative breakout this week – while net speculative futures positioning finds the bears stretched. With two safe havens competing for supremacy, this is a pair to watch.

Chart of USDJPY with 50-Weekly Moving Average and COT Net Spec Positioning (Weekly)

EURUSD and Dow Ready for Breakouts Should Biden Stimulus Plan Urge Volatility

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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