Price Action Themes For FX And US Stocks Ahead Of The 2019 Open

THE Q4 RISK SHIFT REMAINS IN-FOCUS AS 2019 OPEN NEARS

The final few trading days of 2018 are here and next Wednesday, the page will turn into 2019. With US stocks looking at a red close on the calendar year and with Fed policy squarely in-focus, next year will likely carry over the excitement that showed up in Q4 as there hasn’t yet been a show of calm across risk markets. US equities have continued to swing wildly into this year’s close and this begs the question as to how long the Fed can remain as the sole major Central Bank actively pushing tighter policy. The combination of balance sheet reduction, as discussed earlier this morning by my colleague Justin McQueen, along with continued rate hikes have produced a tighter operating environment in the United States.

That tightening has started to take its toll on the risk trade that remained fairly resilient through the first couple of years of the current rising rate cycle; but as the dual forces of both higher rates and balance sheet reduction have played out, risk tolerance has waned as focus has moved squarely over the Federal Reserve. And given the timing of moves in Q4, this appears to carry a strong weight in market participants’ minds.

The US equity sell-off got started on October 3rd, just after setting fresh all-time-highs and on the heels of a speech from FOMC Chair Jerome Powell in which the head of the bank said that the Fed was ‘a long way’ from the neutral rate. This was heavily inferred to mean that the Fed had plans for quite a few more rate hikes ahead, and in short-order US stocks were tipping over. That pain has largely lasted ever since, save for two recovery bounces that showed in late-October and late-November, both of which happened to show around supportive comments from Fed members. In late-October, it was Mr. Clarida, the newly-installed Vice Chair and in November this came from Chair Powell when he presented the bank’s proximity to the neutral rate in a different light, saying that the FOMC was ‘just under’ this rate.

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DailyFX Q1, 2019 Forecasts

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