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Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

John Kicklighter, Chief Strategist

S&P 500, Dollar, EURUSD and USDJPY Talking Points

  • The Trade Perspective: USDJPY Bearish Below 121; USDMXN Bullish Above 20.00
  • We have closed out the month of March and the first quarter with a notable slip in a three-week run in risk appetite measured by the S&P 500
  • Friday brings more than just the start of a new quarter, it hosts March US NFPs and Eurozone CPI; so keep EURUSD in focus
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Risk Trends Into Friday and a New Quarter

There was some month- and quarter-end activity for the markets this past session. By its very nature, the close of a typical investment window is prone to corrective activity designed to balance risk exposure for accounting and speculative purposes. However such movement rarely signals overwhelming intent – leaving the responsibility of trends to subsequent developments that drum up existing systemic concerns or start new lines of worry. I’ll note that to close out both periods, my preferred/imperfect measure of risk trends – the S&P 500 – took an unmistakable tumble into the close of the trading day. The final hour of exchange trade for the index was an accelerated booking of weakly-held long interest that notably closed the bullish gap opened with Tuesday’s jump on the open. After three weeks of remarkably productive climb, we could read this as a genuine reversal; but my conviction awaits a new driving force. Perhaps the March payrolls will provide – though I remain dubious.

Chart of S&P 500 ETF with 20 and 100-Day Mov Averages, 1-Day Rate of Change (Daily)

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Chart Created on Tradingview Platform

Before we dive into the shape of the landscape for Friday’s trading session, it is worth taking a quick look back. Rare is the opportunity to evaluate markets on a monthly (much less a quarterly) basis and not be considered eccentric. There were more than a few remarkable charts on this scale. For example, the US 2-year Treasury yield charge posted an incredible charge that reflected the acceleration in interest rate forecasts while US-based WTI crude oil posted its biggest intra-month bearish reversal (from 130) on record. For the US equity risk benchmark, however, the S&P 500 closed out a fourth month whereby a mid-month speculative bid was mounted to hold back the tide from an overdue unwinding of speculative exposure. Is that the hallmark of conviction or the desperate hold out against an overriding trend reversal? That is all in the eye of the beholder, but I’ll be monitoring technical levels to establish progress to put some quantitative frame work around such an important assessment.

Chart of S&P 500 ETF with 20 and 100-Day Mov Averages, 1-Day Rate of Change (Daily)

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Chart Created on Tradingview Platform

Top Fundamental Concerns: Ukraine and Rate Forecasts

If you are looking for dominant fundamental drivers, I still hold Russia’s invasion of Ukraine as the most open-ended threat on the board. If there was any lingering conviction to Russia’s statement that it was pulling back on the assault of capital Kyiv and another major city in the country, it vanished this past session as military forces escalated their attack on those and other cities. Traditional risk assets – without alternative drivers – would take note with a meaningful slide. Another important development on this front for inflation watchers and general commodity traders as the announcement that Russian President Vladimir Putin had signed a decree that ‘unfriendly’ countries buying Russian natural gas would need to do so in roubles. With USDRUB back at 83.00, that is a serious statement. To help offset the elevated cost of energy products amid these sanctions, the Biden Administration’s announcement mid-week that it would release 1 million bpd from the strategic petroleum reserves (SPR) seems to have offered a drop in WTI prices below the $100-mark.

Chart of WTI Crude Oil Futures with 50-Day SMA, Volume and Net Spec Futures Positioning (Daily)

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Chart Created on Tradingview Platform

From the systemic questions around the global financial system to more discreet scheduled event risk, Friday’s trading session brings with it very specific and high-profile event risk. At the very top of the expected market-movers is the US employment report – also referred to as NFPs. Earlier this week, the ADP private payrolls report for the same period (March) was slightly higher than expected at 455, 000; but the implications this data point holds for the government’s employment figures is extremely disconnected given the propensity of ADP to sharply adjust its own numbers to more closely match the (questionable) government’s figures. Should we consider this data point to reflect on the Fed’s ability to push ahead with its aggressive rate forecasts for 2022 or the divining rod for the FOMC policy decision? That depends on the data collected.

Chart of US NFPs, ADP and Differential (Monthly)

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Chart Created by John Kicklighter with Data from BLS and ADP

Event Risk – And Opportunity – for Friday

Overall, I do not typically like to take fresh trades into the close of a week because the expected liquidity drain can seriously compromise – or completely reverse – exposure you intend to pursue. That being said, there is plenty of event risk on tap through the final session of this trading week that is critical to a fundamental comfortability. While those back-end considerations are worked out, the content perspective can push traders towards assets that are moving aggressively or unexpectedly. I will point out that Friday is fairly light in systemically-important event risk. The US NFPs is top billing, but I will be evaluating the strength of the notional performance without discussing the more systemic maters outside ECB policy sway.

Chart of Major Macroeconomic Events

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Calendar Created by John Kicklighter

If you are keeping tabs on unusual, global players in the risk game; there are remarkable developments to hone into. However, my interest is in the practical. The US Dollar earned its rebound rally this past session, but I can’t say that the market’s development was truly founded in solid speculative focus. There is some risk in following the greenback and US indices to full ‘risk aversion’ with good reason to doubt trends. On the US side, the anticipation of the US employment stats is an overriding focus. The NFPs can prove a driver for further Fed rate expectations, but that outlook is already running very hot. If anything the jobs data can prove a greater risk to retreat than an extension of the prevailing rally. Ultimately, the interest rate reading can reflect upon the Fed’s intended path forward toward monetary policy tightening or it can represent the EURUSD, the Dollar’s waver is worth noting; but the Euro’s own rally deserves a closer look. Through Friday trade, the stimulus-dragged performance and the scheduled Eurozone CPI update seem as if they were ready to bounce. You should be as well.

Chart of EURUSD with 20, 100-Day SMAs, 5-Day Range and 5/20 ATR Ratio (Daily)

Dollar and S&P 500 Primed for NFPs – But Is It a Growth or Fed Driver?

Chart Created on Tradingview Platform

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

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