By Stephen Innes
In the absence of Fedspeak and tier I economic data, the US dollar is struggling to find a grip. Not to unexpected, mind you, as traders continue to rebalance from last week's global risk meltdown. And not to harp on existing risks, but what really matters is how the market is perceiving next week's forward guidance from the Fed. So therein lies the conundrum. Despite the steady uptrend in US economic data, in the absence of inflation, no one - and I mean no one - is betting on an aggressive shift of Fed policy.
Gold is maintaining its tight correlation with the greenback, and despite the absence of escalating geopolitical risk, traders are all too knowing that we're little more than a spark away from re-igniting a free-for-all, whether it's EU political risk, trade wars or the more probable escalation in Middle East tensions. But for now, nothing else matters other than the Goldilocks syndrome.
Too far, too soon as hedge funds trip over each other to get in front of a probable shift in OPEC supply. Calmer heads prevail, realising that while OPEC might compensate for the Venezuelan shortfall, it's highly unlikely their robust compliance on supply curbs is going to fall by the wayside. But this is in no way to suggest we're not in for a bumpy ride pre-Vienna.
What the dollar gives up, gold traders make up. There remains far too much geopolitical risk on the table to lose the plot on the long gold trade. So a "buy on dips" mentality even in the absence of risk aversion suggests gold traders are banking on the USD correction to extend further ahead of the Fed meeting.
The current currency market narrative is all about corrections and rebalancing ahead of the next week's Fed decision, which points to a USD correction with EUR driving the bus.