XM does not provide services to residents of the United States of America.

Daily Market Comment – Dollar stable, euphoric stocks turn lower as busy week begins



  • FX market in a stalemate ahead of crucial central bank decisions

  • Wall Street takes a step back after bull run, tech earnings loom

  • Oil ignores military strikes against Iran, awaits OPEC meeting 

FX traders brace for central bank updates

A massive week lies ahead for investors. Central bank decisions in the United States, Eurozone, and United Kingdom, earnings updates from several Wall Street tech giants, and a heavy dose of economic data releases that include the US employment report all have the capacity to inject volatility into global markets.

All roads lead back to the Fed, which will announce its rate decision on Wednesday. Inflation finally seems to be cooling and leading indicators suggest economic growth is losing steam, but the US labor market remains historically tight and financial conditions have loosened, keeping the risk of a second inflation wave on the table and complicating matters for policymakers.

Markets have fully priced in a 25 basis point rate increase, so the dollar's reaction will depend mostly on Powell’s commentary. One way to balance these risks would be to accompany the smaller rate hike with strict language, reminding investors that the tightening cycle is not done yet and pushing back against market pricing for rate cuts later this year. 

Meanwhile, the European Central Bank and the Bank of England are both expected to roll out bigger rate increases of 50 basis points, outpacing the Fed for the first time this cycle. There’s some doubt about whether the BoE will truly deliver, after the latest round of business surveys underscored UK recession risks, although Cable will also be driven by how stock markets perform.

Euphoric stocks take a breather

Turning to equity markets, a sense of euphoria has been the underlying theme so far this year. Wall Street indices led by the Nasdaq have charged higher, the VIX ‘fear gauge’ is trading at its calmest levels since the tightening cycle began, and spearheading this entire rally are the riskiest and lowest-quality names.

Meme stocks are back in fashion, alternative crypto coins have returned to life, and the market reeks of a gambling attitude similar to 2021 as extremely risky options with zero days to expiry are the latest hot trend.

Behind this euphoria lies a liquidity dump that has countered the effects of the Fed’s quantitative tightening process this year. Faced with another debt ceiling standoff, the US Treasury has been running down its cash buffer at the Fed, a process that essentially releases liquidity back into financial markets.

Therefore, the latest rally seems like a mirage enabled by a temporary liquidity injection, unusual options activity, and a squeeze on short positions. The S&P 500 is now trading at 18 times this year’s estimated earnings in a slowing growth environment, which leaves the market vulnerable to a selloff in case this week’s tech earnings or Fed meeting contain any surprises.

Oil shrugs off Iran strikes

In the commodity arena, oil prices are trading lower on Monday despite a new wave of tensions in the Middle East. A drone attack against military facilities in Iran has left the region in a state of unease, with a Wall Street Journal report suggesting that Israel was behind the strike.

Even though oil infrastructure does not appear to have sustained any damage, it is still strange to see energy markets so calm in the face of geopolitical tensions. Oil prices have been trading sideways for a couple of months now, as optimism around China’s reopening offset the gloom about slower growth in Europe and America. The next key event is the OPEC meeting that will begin tomorrow.

As for today, there isn’t much left on the economic calendar other than some second-tier data releases from the Eurozone. Most of the price action might come down to position adjustments and hedging ahead of the main events later this week.

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.