EURUSD and S&P 500 Won’t Be Able to Fend Off a Break Next Week

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S&P500, Dollar, EURUSD, GBPCAD and GBPNZD Talking Points

  • The Trade Perspective: S&P 500 Bearish Below 4,375; EURJPY Bearish Below 134; EURUSD Bullish Above 1.0800; GBPCAD Bullish Above 1.6500
  • Liquidity is a principal factor to end this week and begin the coming week with volatility readily possible but follow through highly improbable
  • Top event risk next week includes monetary policy balance, earnings and updated growth projections; which holds serious weight for tight SPX and EURUSD ranges

Fundamentals Without Liquidity Skews Towards Volatility and Against Trend Development

The markets hit a liquidity wall through the end of this past week which threw cold water over critical fundamental themes and stalled significant technical moves from benchmarks that could have ignited a market-wide run. With much of the Western World offline through Friday and a number of key financial centers (Europe, UK, Australia, etc) still offline through Monday, gaining serious traction on nascent moves for key assets was simply an improbable scenario. Market depth is critical for fueling significant movement in the underling capital markets. Naturally, expectations of the forthcoming lull seemed to put the S&P 500 and other risk measures into advanced stasis. While the S&P 500 closed out its shortened week 1.2 percent lower through the final active session of the week, the swing fits neatly into the four-day spans’ total range. In fact, the historical range carved out through that period is one of the smallest of 2022 while realized volatility (ATR) over the same period remains comparatively elevated. To me, that translates into high breakout potential; which a forthcoming week directed by interest rate speculation and GDP forecasts seems more than capable of producing. While, I will be awaiting the motivation that actually ushers up the technical break, my bias remains for greater traction should we resolve lower through the 4,375 midpoint of the past two months’ range.

Chart of S&P 500 with 100 and 200-Day SMAs and 1-Day Historical Range (Daily)

Chart Created on Tradingview Platform

This past week, the top fundamental theme driving the global markets – and particularly the FX space – was monetary policy. The scheduled event risk was certainly a principal driver for that theme. Amid US inflation soaring to a four decade high for consumer prices and a record in upstream measures, Fed officials were clearing the way for perhaps more than just one 50 bp rate hike in the coming months and the start of an aggressive quantitative tightening program. That said, the FOMC enters its pre-policy meeting media blackout as of Saturday, so the markets will be totally cast adrift to speculative interpretation. Other areas of the policy map are in the same situation. After the mixed response to the RBNZ and Bank of Canada’s 50bp rate hikes this past session, we aren’t due another major policy group update in a few weeks. Meanwhile, the doves are still firmly planted as was evidence by the European Central Bank’s push back against carry over interpretation of a necessary acceleration in rate hikes from US and UK counterparts. We may not have a long list of explicit event risk to keep the embers of this theme burning in the forefront, but it will absolutely not slip quietly into the backdrop.

Chart of Relative Monetary Policy with Rate Expectations Through Year End

Chart Created by John Kicklighter

The Major Scheduled Event Risk

Considering that we are dealing with a swoon in liquidity and the proverbial clouds have cleared over the interest rate speculative docket, fundamental attention will likely draw on various sources over the coming week’s wroth of trade. Earnings remains a popular theme for the traditional long-only equity trader in the most common asset class in the modern portfolio. However market capacity likely depends on the general mood the market is in for interpretating the macro implications of earnings numbers from the likes of Netflix, Bank of America and Proctor & Gamble. A far more interesting theme for me is the economic health assessment. There are few high profile updates on this front. Most explicit is the Chinese 1Q GDP release, but this data is notorious for not straying far from the government’s expectations. More interesting is Friday’s PMIs for March which are a timely proxy for GDP. But what can be better than a recent update on economic expansion? Forecasts for what the future holds. The IM F and World Bank Spring Meeting brings, among other things, updated predictions for global growth and the major regions that fuel the world’s growth. A sharp adjustment for any region could compound pre-existing concerns that in turn touch off significant currency adjustment.

Calendar of Major Economic Events

Chart Created by John Kicklighter

The relative value status of the FX market makes for a very effective macro environment for fundamental updates. EURUSD was the focus for a lot of attention this past week owing principally to divergent rate paths for the ECB and Fed. That said, the European group’s vow that it was going to stick to its measured easing of accommodotative rather than conform to the likes of the Fed seemed to touch serious Euro selling – though the market wouldn’t hold its head underwater on the 1.0800 support. While rate speculation is an ongoing matter, I believe the more tangible fundamental concern is will be around the distinct exposure that the European area has to the situation Ukraine. That will very likely come through the IMF’s updated growth forecast. Whether EURUSD definitely breaks 1.0800 or puts progress in a reversal from this floor depends, the market will likely find some resolve.

Chart of EURUSD with 100-Day SMA and ‘Wicks’ (Daily)

Chart Created on Tradingview Platform

Other Measures to Monitor through the Coming Week

While I am principally focused on the likes of the S&P 500 as a baseline for risk trends and EURUSD as it defines the extremes in monetary policy over the coming week, there are a couple of very significant developments that should be on all macro traders’ radars ahead. One lingering matter of importance is the threat of intervention. As growth disparity balloon and monetary policy differentials grow extreme, pressure will build on economies and normal factors of the system that adapt to such developments. For exporters whose monetary policy is essentially a mirror of larger counterparts’ efforts with a little more accommodation, perceived changes in interest rates can exert a lot of sway. For those markets with intervention potential, USDJPY is one of the top candidates. Not long ago, the Japanese Ministry of Finance and Bank of Japan BOJ) acted directly to curb significant Yen movement – but the market decried the move and the G-7sent a warning letter. While I believe authorities will not be as cavalier about altering the course of their local exchange rate, the extreme inflation in commodity prices and depreciation on the can converge to extreme consequences. I still think intervention risk is a considerable possibility.

Chart of USDJPY with 100-Week SMA with 6-Week Rate of Change (Weekly)

Chart Created on Tradingview Platform

An even more infrequent analysis target for most traders that I feel is worthy of our observation is USDCNH (US Dollar to Chinese Yuan). Talks of PBOC rate cuts pervaded this past week, but the group would not fulfill expectations. In the week forward, we have key event risk including Monday morning’s Chinese 1Q GDP update. This data is notorious for not deviating far from expectations, but the markets are in a ‘read into it’ mood. Further with the Chinese authorities talking about easing while the Fed is on the cusp of its first half-percentage point hike; there is a lot of potential built into this too-frequent stoic player.

Chart of USDCNH with 100 and 200-Day SMAs and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform