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Will Market Depth Return for Breakouts and Trends This Week?

Talking Points:

  • Tight consolidation and precarious technicals from the likes of the S&P 500, VIX and USDJPY threaten resolution
  • Volume and participation however are extremely low due to combined seasonal, structural and situational factors
  • Top event risk this week includes the Jackson Hole Symposium, leaders’ Brexit meeting and PMI data (GDP proxies)

See the DailyFX Analysts’ 3Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

All the sparks in the world will not create a fire without sufficient fuel. Market depth (participation) is too shallow to generate the major breakouts that so many currency pairs and asset benchmarks seem ready to trigger. However, this state of complacency and indecision will inevitable pass. The question is ‘when’. Historically, the VIX volatility index experiences a seasonal climb in August that hits a peak through September and October. Yet, this and other volatility measures are still trawling exceptional lows. Even if we were to see a meaningful fundamental catalyst, it would be difficult to overpower the comfort that thin volume has instilled.

In the week ahead, there are a number of noteworthy events lining the docket. At the top of the list stands the annual Jackson Hole Symposium that the Kansas City Fed hosts. This meeting draws global policy officials, corporate leaders and influential economists to discuss crucial themes in the economy and financial system. This year’s theme is ‘designing resilient monetary policy frameworks for the future’ – a fitting topic given the failing influence of ever-expanding stimulus efforts from central banks around the world. Whether we are looking for guidance on Fed timing, a coordinated approach to policy or threats of currency wars; this event will still struggle to draw the trading rank back to the market.

Currently, the market is under the crushing confluence of seasonal, structural and situational circumstances working to quiet the market. While volatility historically picks up through August, volume is typically at its nadir. Add to this the thinning influences behind years of growing skepticism amid stimulus saturation and shortened list of critical themes that are capable of changing the broader market’s convictions; and it can be particularly difficult to overcome the black hole of lethargy. The quiet will end, yet it is most likely to do so when the seasonal tides revive participant or through an exceptionally influential development. While we keep a look out for the signs of systemic change, trading strategy should be set to match conditions. We weigh the return of action in this weekend Strategy Video.

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