4 Risk Events to Trade This Week

Jarratt Davis

Special Consultant to the FPA
In this week's report, we will review this week’s top four trading opportunities. We will discuss why these events could be market moving and look at potential scenarios.

Last week, the market’s focus continued to revolve around geopolitics. In particular, US/China trade wars and the EU Summit.

In fact, according to their latest reports, Danske Bank argues the major driver for several weeks has been geopolitics.

ING has also stated that trade wars and European politics remain dominating themes.

As such, we expect political and geopolitical events to remain influential going forward.

Nevertheless, there are still four risk events which could provide great opportunities for the remainder of the week.

This week’s top four risk events are:

  • UK Services PMI. The UK’s Services sector represents around 80% of UK GDP, making this event key to the UK’s economic outlook.
  • FOMC Meeting Minutes. The Fed’s meeting minutes will help provide further insight into the FOMC’s current view and future expectations.
  • Canadian Employment and US Employment. Employment data is influential to both the BoC and FOMC, making employment reports highly market moving event.
Wednesday, July 4
UK Services PMI – GBP
UK Services PMI is the third and final UK PMI release. Manufacturing PMI took place on Monday and Construction PMI on Tuesday.

Of the three releases, Services PMI is the most important and hence, most likely to provide a high conviction trade.

This is because according to the ONS, the Services sector represents almost 80% of UK GDP.

Furthermore, this week’s report could garner even more attention due to last week’s GDP report.

The report saw a strong rise in Services Output, increasing hopes for a pick-up in the UK economy.

Therefore, a strong Services PMI could further solidify last week’s GDP report and growing expectations for an August BoE hike.

It’s worth noting that the Manufacturing and Construction PMI print might also influence how the market reacts to Services PMI.

Both reports came in better than expected, Manufacturing PMI 54.4 versus 54.1, Construction PMI 53.1 versus 52.5, so there could be a stronger reaction to a beat on Services PMI.

Therefore, the best trade will be if the outcome of the Services PMI will be in line with that of the Manufacturing and Construction PMIs.

If the Services report misses, the bias will be less clear and any trade of lower conviction.

Thursday, July 5
FOMC Meeting Minutes – USD
The FOMC’s Meeting Minutes will relate to their June 12th-13th meeting. At this meeting the FOMC announced a 25 basis point hike, increasing the Fed Funds Rate to 1.75%-2.00%.

The Fed’s dot plot increased to suggest the Fed expects four rate hikes this year from three hikes prior.

Furthermore, the Fed dropped its reference that it expects rates to be below neutral for ‘some time’.

Overall, the market considered the Fed’s June meeting to be hawkish and USD positive. With the release of the minutes, the market will be looking for even more insight from the Fed.

According to Scotiabank, there are two broad areas of focus. The first is on the balance of opinion on how the FOMC reads trade policy risks and their effects upon the outlook.

The second is on how thin the consensus for two more hikes this year is.

This is because although the Fed’s dot plot increased, Powell stated that ‘most participants did not revise their forecasts’.

If the minutes point to a less hawkish Fed than the market initially interpreted, USD will weaken. This would provide a great opportunity to sell USD.

Conversely, if the minutes continue to point to an increasingly hawkish Fed, USD will likely remain supported. This could provide a great buying opportunity.

Of course, if the minutes fail to provide any surprises or further insight, there will likely be no clear opportunity.

Friday, July 6
Canadian Employment Report – CAD
Canada’s employment report consists of two releases, the Unemployment Rate and Employment Change.

Of the two, the initial reaction typically comes from Employment Change. This is because this component can deviate quite significantly from expectations.

Furthermore, we can evaluate Employment Change in greater detail due to the Full-Time component. This means the report can be misleading if Full-Time contrasts with the headline.

Therefore, for the best opportunity, any deviation in Employment Change should be a result of Full-Time Employment.

If a deviation results from Part-Time Employment, the eventual outcome will be uncertain.

Regarding the Unemployment Rate, any significant deviation from expectations will likely influence CAD.

However, this too could create volatility if it contrasts with the Employment Change.

Interestingly, Scotiabank argues that Canada’s employment report shouldn’t influence July rate hike expectations.

This is because Poloz recently stated that the BoC doesn’t set policy based on single data points.

Nevertheless, a strong positive deviation should see CAD strengthen. A strong negative deviation, on the other hand, will likely see CAD weaken.

US Employment Report – USD
The final event of the week will be the US’s employment report.

This report consists of three major releases. These are Non-Farm Employment Change (NFP), Average Hourly Earnings and the Unemployment Rate.

The market’s initial reaction typically results from NFP. With USD strengthening on a positive deviation and weakening on a negative deviation.

Although the initial reaction comes from NFP, the more important data point is arguably Average Earnings.

This is because Average Earnings has an underlying influence on inflation.

A significant increase in Average Earnings could increase rate hike expectations. While a miss on Average Earnings could weigh on rate hike expectations.

Of course, any deviation in the Unemployment Rate will also be influential. Another drop to multi-year lows will be USD positive, especially to the fundamental outlook.

Given the number of market-moving data points released at once, this event tends to see prices whipsaw.

The trick is to only enter once you’ve analysed all three components and are sure of the overall bias.

All four of these events have the potential to move markets and create great trading opportunities.

Of course, you should also consider any external influences, especially given the current role geopolitics is playing.

Further developments such as EU politics, trade wars and Brexit will continue to influence currency pairs and potentially overshadow data.

For this reason, before trading any risk event, consider the sentiment going into the event.

This will allow you to more effectively determine how influential data points will be and whether there is an opportunity or not.

The goal of this report is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, please type your question in the comments below.
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