Three Things to Watch on Thursday

THREE THINGS - Today should be an interesting day for the market. There are going to be three things going on today that will be on the minds of traders. The first is this ongoing slide in the US Dollar, which extended against the Euro and Pound on Wednesday. The US Dollar has been hit hard across the board in 2017, with setbacks intensifying in recent days, leaving many out there wondering if there is a modest US Dollar recovery on the horizon. The second is the Bank of England policy decision, which comes with an inflation report and the latest Minutes. And the third is tomorrow's US employment report.

TECHNICALLY SPEAKING - As far as the intensity of this US Dollar slide goes, it has been rather aggressive, with many currencies breaking meaningful longer-term levels of resistance to suggest the Dollar could be staring at the beginnings of a secular decline. The Euro is at a 2.5 year high, while the commodity bloc currencies are all at +2 year highs of their own. Even the Yen has been strong despite an ongoing commitment on behalf of the Bank of Japan to stick to accommodative monetary policy. But we have reached a point on the daily charts, where the move is so stretched, that it would be completely reasonable to expect the Buck to make some form of a recovery. With that said, let's transition into the Bank of England risk later today. 

FOLLOW THE LEADER - One of the things I warned about several weeks back was the possibility other central banks would take a more cautious approach to policy reversal in the aftermath of Yellen's decidedly less hawkish July testimony. Her testimony oozed with concern about lower inflation, while at the same time, downplayed the amount of rate hikes to expect going forward. And this was quite the departure from the Fed's June meeting message. Since that testimony, we have seen an ECB decision that showed Draghi applying restraint and caution,  and this week's RBA decision, in which the Australian central bank also projected a similar layer of added caution. Clearly both central banks wanted to avoid rapid appreciations in their respective currencies on dovish Yellen speak and responded accordingly.  

Pound could be at risk when considering recent central bank meetings. Via @joelkruger

THEREFORE - And so, looking at today's Bank of England decision, I would propose the BOE will follow that same line, perhaps having added incentive to do so with recent inflation data coming in surprisingly soft and the Brexit overhang uncertainty still looming larg. It would be silly for the BOE to give off a more hawkish message in my opinion as there is no point in making any moves that push it ahead of the Fed in the policy reversal cycle. Better the BOE keeps with that more cautious message like the ECB and RBA, preventing the Pound from rocketing further up. And if subdued inflation is a big concern, an appreciation in the Pound is not something that will do anything to help the BOE's cause. With all of that said, it stands to reason that we could see a retreat in the Pound in the sessions ahead.

AWAY FROM THE HEADLINE - Finally, tomorrow, it's going to be all about that US employment report. But NFPs and the unemployment rate are not going to be where you want to look. While a major miss on NFPs or the unemployment rate could move the market, this isn't as likely a scenario and instead, the priority should be on that hourly earnings component. Right now, it's all about inflation and where we're at given how this will dictate the Fed's decision making process going forward. The US Dollar already got an indication of possible upside pressure on inflation earlier this week with core PCE ticking up, and if tomorrow's hourly earnings come in above forecast, it could spark a more pronounced recovery in the US Dollar.

GAME CHANGER? - The Fed is at a point where it has entered the policy normalization process, well aware it needs to be thinking more seriously about the dangers if it doesn't start erring on the side of policy normalization. And if tomorrow's hourly earnings tick up, the Fed will be backed into that corner where it will be needing rather than wanting to be more aggressive with policy reversal. This would then be one of those developments that could change the game in 2017 and bring the US Dollar back from the ashes, a prospect that has been looking quite bleak. Another likely fallout from such a development would be the start to downside pressure in US and global equities, yet another development that no one believes will ever happen. 

It Hasn't Even Started

I'm looking for quite a bit of USD weakness in the months ahead and right now...


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