EURUSD Reverses from 1.0500 Again as Fed and ECB Will Both Escalate Signaling

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S&P 500, China, EURUSD, Fed and ECB Rate Forecasts Talking Points:

  • The Market Perspective: USDJPY Bullish Above 141; EURUSD Bullish Above 1.0000; Gold bearish Below 1,750
  • The market opened to some modest volatility thanks to a focus on Chinese protests over covid lockdowns, but the S&P 500 has yet to break out of its narrow range.
  • Monetary policy speculation will increase starting today as the US and Europe face the most fundamental feed… creating an interesting backdrop for EURUSD.

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After the kind of activity we faced leading up to the end of last week with the Thanksgiving holiday, any modest pick-up in volatility would be highlighted. This is what we saw this past session, when the S&P 500 broke modestly lower on the open and continued to extend its overall losses in the session to -1.5 percent. That increases the count of one percent or greater declines in a daily session to again match the bearish progress of 2008. There was also a fundamental sign for market participants to rally and justify the decline: the growing protests in major Chinese cities over crushing. covid lockdowns. However, despite the clear story and quite significant market movement, the S&P 500 would still not leave the comfort of the range it reached during the past 10 trading days (equivalent to two weeks). At this point, the 11-day historical range as a percentage of a point is equivalent to 3.2 percent – the smallest trading gap since November 24 of last year. The average true range (a measure of realized volatility) is the lowest since January of this year. In other words, we have yet to break the seal of volatility and liquidity.

Chart of the S&P 500 with 100 and 200-day SMAs and 1-day historical range (daily)

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Chart Created on Tradingview Platform

If we’re looking for a fundamental jump to recapture the post-holiday liquidity conditions, we’ll probably have to find it from somewhere other than China. The reports from the world’s second largest economy were indeed significant. The popular pushback against President Xi Jinping’s policies is the biggest we’ve seen since he came to his role at the head of the country. This creates considerable uncertainty not only for China itself. Already in 2008, when a large part of the world fell into the spiral of recession, China very notably managed to avoid a severe contraction and in turn helped to stop the global recovery that followed. The threat this represents, however, is moderated by the practicality of the control the government has over conditions in China. It is likely that the government will quell these rebellions and the economic drain that the “zero covid” policy is taking on its economic health will be more modest and exaggerated over time. That said, it’s worth keeping an eye on USDCNH – even if you’re (reasonably) skeptical of the level of the Shanghai Composite.

Chart of USDCNH with 100-Day SMA Overlaid with the Dow to Shanghai Composite Ratio (Daily)

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Chart Created on Tradingview Platform

If we’re looking for genuine fundamental inspiration, there’s no need to look much further than next session’s economic docket. We have very strong event risk for major economies – and it looks to intensify as the week goes on. In particular, the topics of monetary policy forecasting and recession risks are two of the most prominent topics on tap. Although there are both official GDP proposals from Switzerland and Canada ahead, I believe that the US confidence report from the Conference Board and the Eurozone sentiment surveys for November are the bigger reflections of major economies. Add to that next session the fact that we have the Chinese government PMI and some key US employment data; and here is an important weight. That said, monetary policy appears to be the bigger lift going forward. Away from the Eurozone, we await both the report on consumer inflation expectations for November and the official CPI release from Germany. While we’re not due the US PCE deflator (the Fed’s favorite inflation report) until Thursday, the Fed speech we’re digesting this week is critical given that it’s the lead-up to the media blackout that precedes the next FOMC rate decision (December 14. ).

Critical Macro Event Risk in Global Economic Calendar for the Next 48 Hours

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Calendar Created by John Kicklighter

Given the push and pull of US interest rate expectations, I will focus in particular on EURUSD. This past session, ECB President Lagarde offered a mild warning that inflation may not have peaked in the Eurozone and it could surprise at the top. Meanwhile, from the Fed, there is a much more concerted effort to signal to the market that the flight path for Fed rate hikes in 2023 is likely to be higher than what the market has been calculating. In addition, they continue to push back expectations of tax cuts at any time of the year. With EURUSD failing to take 1.0500 for a second time – amid a sharp reversal on the season – this is a fundamentally primed market to watch.

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Chart of the EURUSD with 100-Day SMA and ‘Wicks’ Overlaid with EU-US 2-Year Yield Spread (Daily)

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Chart Created on Tradingview Platform

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