Dollar Rally, ECB, Brexit Sensitive, Chinese GDP Top Themes Ahead
- The EUR/USD has tumbled these past weeks bolstering the Dollar Indexes, but the strength looks uneven
- Risk trends will continue to draw scrutiny and uncertainty, but Brexit is still where market sensitive is greatest
- Top event risk in the week ahead is the ECB rate decision with a fear for Taper and the Chinese 3Q GDP update
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Volatility is starting to pair to the general level of anxiety in the markets. We still have yet to see the market commit to a clear effort to build or unwind exposure, but the frequency of jolts in price and volatility signal tension moves closer to a breaking point. This past week, the S&P 500 - a perfect sentiment benchmark in its imperfection - cleared a number of tentative support levels that have put participants from short-term speculators to more durable buy-and-hold investors on alert. A resolution to a further, lasting expansion in risk is possible but highly improbable. Wind down is far more potent and likely. The question is timing. That is less to do with the spark and more to do with the backdrop. Traders should remain flexible and oriented towards shorter-term in the week ahead, but be prepared should the tides change.
As immense and abstract as 'risk aversion' is, we also have tangible themes that are motivating volatility and opportunity. The Dollar has been a source of interest for the FX rank with a substantial rise to seven-month highs for the ICE Index. Yet, that performance is uneven with seeming limited backing from rate expectations. Yellen spoke this past week, but her remarks seemed more accommodative than austere and Fed Funds futures projected moved little for December (probability stands at 66 percent). Perhaps CPI and more Fed speak this coming week can change those stakes. Meanwhile, the Pound continues to show exceptional sensitivity to Brexit fears through lawmakers' remarks, BoE speak, data and surveys. Another GBP/USD wind up to start the week could cause volatility.
Ahead, two less popular themes of late will be thrust back into the forefront. The Chinese 3Q GDP release is due Wednesday morning. This will mark the start of the third quarter growth statistics run that will eventually see the US, UK, Eurozone and Japanese figures follow in the weeks after. It will also feed a particular concern brewing around the stability underneath the world's second largest economy as its USD/CNH once again reaches levels considered dangerous. Another event of consequence is the ECB rate decision. Rather than the desperate QE efforts we have seen this past December and March, there is potential for the central bank to make the same inevitable shift that the Fed did with its Taper. If that switch is realized, the implications could be significant in for the FX market's standing. We discuss this and more in this weekend Trading Video.
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