Talking Points:
- The Dollar Index was arguably in an ideal situation to forge a break this past session, but the opportunity fell apart
- When technical, fundamental and general conditional factors align; the opportunities for more significant moves arises
- Should the final piece not be found, we shouldn't abandon the market but rather look at it for its new potential
See how retail FX, Indices and metals traders are positioned in the market after the high-profile FOMC rate decision failed to trigger the leveraged technical opportunities across the Dollar pairs and broader markets.
Ignoring the specialist's proclivities, the best trades are those that pull together the best conditions between fundamentals, technicals and general market conditions. It is rare where all three elements present themselves; and in such circumstances, the highest probability, material trade opportunities often arise. That seemed to be the situation we faced with the Dollar Wednesday. All the elements seemed to be aligning, with only the fundamental trigger a necessary spring to the appealing scenario that had taken shape. With all the setup, though, the spark would never come. The extraordinarily tight range on the DXY index that developed immediately following a critical technical breakdown (of a head-and-shoulders pattern) would not find the release from a definitive shift in Fed bearing and market speculation. What was left in the market looked like undetonated ordinance - still very potent but now significantly more unpredictable.
What will happen with the Dollar going forward? There is still a remarkably constrained backdrop to this benchmark currency. A technical break is inevitable, but the shape it takes will be significantly more difficult to account for. Not only is direction up in the air, but now the uncertainty spreads to the volatility that shapes the initial clearance and the momentum that follows thereafter. So, even the adaptable and shorter duration traders will face a more difficult situation moving forward. Another spark may come along - though Thursday is light of critical event risk and Friday's high profile NFPs has likely seen its influence downgraded by the outcome of the Fed's policy update. If we do realized a break moving forward, we have to establish if it is one of necessity (we simple ran out of viable range) or conviction (it was motivated by a significant development). The docket will struggle to meet the latter and it is rarely good practice to depend on unexpected - and thereby unlikely - developments.
While the Fed rate decision this month is an ideal example of what happens when all but one piece ends up missing from the profound trade opportunity, such situations are far more common than some may appreciate. The Pound's rally following the snap election that pushed GBP/USD to 1.2600 and on to 1.2800 had the most of the ingredients but not the full recipe. Hence, we find the currency struggling to make something of its drive today. The S&P 500's rally post French election has left it in a tight range at the cusp of record highs without a clear shoe horn to offer it meaningful release. Oil is perhaps the most recent example with the technical appeal of a very prominent channel support giving way, but the motivation to carry it through seems dubious at best. We should take away from this examples the underlying lessons of what to look for and how to still engage a market that doesn't provide the best-case-scenario outcome. We discuss exactly that in today's Strategy Video.
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