Talking Points:
• September's NFPs couldn't leverage a breakout from the dwindling S&P 500 range this past week, extending anxiety
• After the Pound's flash crash, GBP/USD settled significantly higher than its Friday low - though tension remains
• Themes like unresolved risk trends, fading monetary policy confidence and Brexit will lead with few key events
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
When markets are this wound up, there are bound to be fits of volatility as the anxiety spills over. This past week's top headline was the GBP/USD flash crash which saw an extraordinary 6 percent drop in one of the world's most liquid currency crosses in the span of only a few minutes. While fundamentals certainly contributed to this extreme move, it was the underlying market conditions that were the true culprit; and that is a more universal state for the financial system than many likely appreciate.
In contrast to the fireworks from the Cable, one of the benchmarks for the broader financial system closed out the week without the resolution it seems to be careening towards. The S&P 500 has worked its way back into a consolidating wedge that is straining to contain the slowly growing level of volatility in the financial system. September US payrolls were staged as a possible catalyst to break the tension - for better or worse - but the event risk simply could not muster the resolve. NFPs were modestly lower than expectations but still on pace for a steady growth in the US labor force. An uptick in the jobless rate from multi-year lows was met with similar indifference, while the average hourly earnings contributed modestly to year-end rate hike forecasts. Now the pressure behind speculative exposure is left to troubling market conditions (thinning liquidity, shifting thematic trends, fading confidence in monetary policy) without the convenience of a particular fundamental pin to prick the distended balloon.
Trading approach should be dictated by the conditions we face. Growing uncertainty yet a tendency towards ranges should make us more cautious with lower exposure, shorter duration trades and more realistic stops and targets. This places different setups in a certain hierarchy. EUR/USD, as quiet as it seems, offers a greater buffer to many of the most extreme speculative outlets. In contrast, USD/JPY and AUD/USD have supplied more volatility; but they represent pairs that can be readily jolted by sudden tide changes. Sentiment will remain a primary concern for the market; but traders should also keep tabs on faltering confidence in monetary policy, Fed rate speculation and Brexit influence among other themes. We look at the practical trading approaches for the market in this weekend Trading Video.
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