Looking ahead to EURUSD activity, VIX recharge and key market data

S&P 500, VIX, EURUSD, rate forecasts, recession risks and liquidity talking points:

  • The market perspective: USDJPY bullish above 141; EURUSD bullish above 1.0000; Gold bearish below 1.750
  • Liquidity is the most immediate consideration for market potential, but a transition in the coming week will see a return to holding and an extremely low starting point on volatility
  • There is a thick array of risks from key events next week, from Eurozone CPI and US PCE deflator to rate speculation to US consumer sentiment and NFPs to recession fears

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As many expected, seasonal conditions would eventually make their way with markets headed for the notorious liquidity drain that is the US Thanksgiving holiday season. Despite the presence of some closely monitored fundamental events (among others, the OECD economic forecasts, the November PMIs and the FOMC meeting minutes), the suppressed liquidity levels would not inadvertently trigger high volatility in the main capital. During the remainder of the holiday trading week, there will be a significant escalation in the participation restriction; but this should not be taken as reliable evidence that markets will be entirely contained in sharp ranges. Shallow conditions can generate severe waves in the short term. That said, as long as there are no major and unexpected headlines from the world’s largest financial centers; we will likely shift our expectations for systemic developments into the new trading week. The S&P 500, as its primary measure of sentiment, will kick off the return of liquidity after its tightest 9-day trading range since January. Barriers on this technically capped range roughly align with the 200-day and 100-day simple moving averages…to make it easier for the less technically inclined to monitor.

S&P 500 chart with 100-day and 200-day SMA and 1-day history range (daily)

Chart created on Tradingview platform

As we look into the new trading week with post-holiday liquidity expectations and a significant increase in the pace of planned event risk, I think it is important to reflect on the state of market complacency. There are many ways to measure market sitting duck syndrome, but the most popular VIX index presents the accessible measure with an exceptional level of lead. The so-called “fear index” fell for six consecutive trading sessions to Wednesday’s close, closing on a well-worn wedge around the 20 level. This is not an extreme all-time low in the VIX, but it registers as a relative nadir which it has previously triggered a reversal in (implied) expected volatility as well as some notable turns for the underlying capital markets (the S&P 500 as a basis here). Overall, these appear to be exceptionally low levels given concerns about recession risks, and even “holiday trading conditions” would not justify excluding risk exposure at this juncture.

VIX Volatility Index chart with 20-day and 200-day SMA and consecutive candlestick movements (daily)


Chart created on Tradingview platform

While liquidity will play a huge role in the market’s ability to generate significant traction in the week ahead, the risk of planned major events will play an outsized role in our eventual activity levels. There are unresolved and systemically important economic threats in the open market that can be readily triggered by a high-level engineered event risk. In general, I am monitoring both scheduled and unscheduled fundamental updates that speak to monetary policy developments and recession risks. That said, unforeseen financial disruption should be considered a possible out-of-control risk. Developments such as the Russian invasion of Ukraine, the UK’s “mini budget” debacle, and the implosion of FTX cryptocurrencies are distinct events so far in 2022; and they are unlikely to be the least of the unpredictable developments we encounter moving forward. Aside from the unforeseeable, there are very real and known threats in recession risks and monetary policy pressures. On the first consideration, he offered the OECD’s warning last week that the outlook for economic activity in 2023 looked increasingly chilly and dependent on expansion from countries like China and India. Evidence of a shift from reduced economic expansion to outright contraction appears to be a formality of overdue data, but the market still seems to be living on a sense of hope.

Risk of critical macro events on the global economic calendar for the next 48 hours


Calendar Created by John Kicklighter

For markets at the crossroads of major fundamental trends, there appear to be few measures more exposed than the EURUSD. This does not mean that this exchange rate is due to a clear carrying and productive trend. Reality tends to meet just the opposite result when the risk of planned events is dense. When there is a risk of a planned event on either side of the pair tending to ‘beat’ or ‘miss’, the impact may be more or less an offset in the realized price action. On the euro side of the exchange rate, the eurozone consumer inflation indicator (CPI) and unemployment rate will be a critical burden on an economy that the OECD warned was at exceptional risk in 2023 and given that the ECB has been urged to ‘close the gap’ with the Federal Reserve. Meanwhile, the dollar will be boosted by a combination of event risk in the Conference Board’s consumer confidence survey, PCE deflation (the preferred reading of inflation by Fed) and November nonfarm payrolls for a comprehensive read on the top fundamental concerns of the world’s largest market.

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EURUSD chart with 100-day and 200-day SMA and COT net spec placement (daily)


Chart created on Tradingview platform

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