EURUSD and Risk Focus on Fed and Trade Rumors (Webinar)
Fundamental Talking Points:
- Geopolitical tensions tear the focus away from monetary policy anticipation to start the week
- While the threat of a conflict involving the West over attacks on Saudi oil production linger, persistent concerns pressure us back on course
- Top thematic risk this week - over recession fears and trade wars - is the role monetary policy plays, with the Fed anchoring 6 decisions
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Geopolitical Tension Raises Its Ugly Head
Heading into this new trading week, fundamental prioritization had neatly directed the markets attention away from trade wars (which seem to be cooling as the US and China return to negotiate) and recession fears (as the data thins out and yield curves attempt to normalize). That left a very overt, mid-week run of central bank rate decisions as a tangible milestone for fundamental attention. That tidy transition in focus was upended over the weekend however with news that Saudi oil production facilities had interrupted 50 percent of the country's output, equivalent to 5 percent of global supply. The instigator to this attack is important it could draw in larger military powers into a serious conflict. Yemen's Houthi rebels took responsibility, but the US Secretary of State said there was no evidence they were involved and President Trump said in a press conference it looks likely Iran played a role. Threats of conflict involving the United States in the Middle East has risen since the US withdrew from the nuclear agreement with Iran and subsequent economic sanctions were applied. Should powers not walk delicately around this situation, an under-priced and abstract risk will compete for the market's attention.
Monetary Policy Remains the Most Reliable Theme This Week
Should there be no steady escalation of tension in the Middle East over the subsequent 48 hours of trade this week, the market's attention will inevitably shift back to a critical theme that carries great weight and explicit time frames. Monetary policy has been one of the prime market issues that we have seen rotate control of the capital markets alongside trade wars and growth fears. Following the decision last week by the European Central Bank (ECB) to push a broad dovish agenda - 10bp rate cut to -0.5 percent, restart QE purchases on November 1 and introduce tiered lending - the market is placing greater attention upon the external support provided by the world's central banks. As it happens, the probability of a further cut from the Fed directly following the July reduction is dropping from certainty to approximately 65 percent. Nevertheless, there remains considerable expectation - or perhaps demand - that significant accommodation come from the US central bank. That creates considerable potential for the US Dollar and US capital markets, but it is more systemically important to the balance of sentiment more broadly.
Don't Underestimate Trade Wars and Recession Fears
The Federal Reserve isn't the only central bank due to update its policy this week. The Bank of Japan and Swiss National Bank are extreme doves who are struggling to generate significant traction on their already extreme policies (an open-ended stimulus program and negative rates respectively). The BOJ has been contemplating a dive into negative rates and the SNB has seen the pressure on its own effectiveness further pressured by the ECB's decision to loosen the reigns even further. Beyond the convenience of the scheduled event risk, there remain prominent risks from the unfolding but undated themes of trade wars and recession fears. In the former, the US and China have made efforts of good will and talks are set to resume at the deputy level on Thursday. As for growth concerns, an absence of critical GDP-linked data helps along the rebound in the segments of the Treasury yield curve that have recently caught traders' imaginations. Yet, it would be unwise to presume these issues are resolved.
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