Positivity continues to help risk and hurt US dollar

We’ve seen a positive feedback loop develop over the last few days after the weaker than expected US inflation figures gave a huge and historic boost to financial markets.

As well as several statistical measures which showed that “peak inflation” might now be in place after many false dawns, a revision in China Covid policy and a possible de-escalation in the Ukraine-Russia conflict have also helped bring more positive vibes to risk markets as we head into year end. The Xi-Biden meeting yesterday added to this sentiment.

The fear of missing out or “FOMO” is being mentioned again on trading desks as fund managers who are knee-deep in cash holdings contemplate jumping on board the bull markets we are now seeing in numerous stock indices.

For example, the German Dax has gained over 20% since its lows in early October which is the classic definition of a market in bull territory.

In fact, a new moniker has been thought of by one fabled investment bank, “FOMU”, which means “Fear Of Materially Underperforming”. It’s not got such a ring to it perhaps, but it tells us that the seasonal characteristics of an equity rally could quickly come into focus. According to data from the Bank of America, fund managers have been holding more cash than at any point since 2001.

 

US equity benchmark nears key level

The broad-based S&P 500 added 6.4% on Thursday and Friday last week while the Nasdaq Composite climbed 9.3%, its biggest two-day gain since the GFC in 2008.

These moves came after the latest US CPI slowed to 7.7% in October, less than the 8% forecast by economists. A sharp easing in Fed rate expectations has followed with the peak Fed funds mark now seen below 5% from above 5.25% seen only a few weeks ago. This has given a huge lift to interest rate-sensitive sectors.

Technically, the blue-chip S&P 500 tapped the hugely psychological 4,000 level yesterday. A near-term Fibonacci level (61.8%) of the August decline also sits just above here at 4,008.

If the short-squeeze and bullish momentum continues, the widely watched 200-day simple moving average is a major upside target at 4,064.

 

Dollar doldrums ongoing

The greenback continues to struggle to find bids in the current environment after it lost over 4% of its value on the DXY last week.

Numerous Fed speakers are scheduled over the coming days with policymakers not wanting to make any concessions to inflation at this point.

Indeed, the dove Lael Brainard signalled there is more work to do while also stating explicitly that the Fed will likely shift to slower rate increases soon. But the FOMC is much closer to the end of its rate hiking cycle now with slower growth likely to emerge early next year along with a further reduction in price pressures. Calendar risk events are relatively light this week, but the dollar may find itself a bit more susceptible to soft economic data in the near term.

EUR/USD strength is largely being driven by dollar dynamics at present though lower energy prices and firmer equity markets have certainly underpinned some support for the euro.

The world’s most popular currency pair broke out of this year’s long-term bear channel at the start of the month. It has popped up above the August high at 1.0368 this morning and is approaching resistance at the 200-day simple moving average at 1.0427.