Market overoptimistic about frontrunner Kevin Warsh?

[Ben Graham]

Last night, rumors hit the market that Kevin Warsh would become the new Fed chair. Warsh previously served on the FOMC and advised Trump on economic matters. After the news, risky assets immediately sold off. The US dollar, however, experienced only a brief burst of optimism, according to many economists. Let's unpack why the market reacted this way and what to expect from Mr. Warsh.

Let's start with the fact that Warsh has repeatedly spoken in favor of shrinking various monetary?stimulus programs and has historically opposed too soft monetary policy. What does that mean for US stocks and crypto? In the longer run, investors should not expect fresh liquidity to appear out of nowhere simply because the Federal Reserve pushes investors out of bank deposits and bonds into stocks and crypto via low interest rates or by printing trillions that then spill into various markets. In other words, yesterday's market reaction largely reflected old statements rather than new policy.

On FX, the dollar rose only modestly — arguably not even a real rise. Still, a tougher monetary policy stance and reduced stimulus would theoretically support the currency. Yet the dollar did not materially improve its position after the news: having lost almost 5 cents over the week and then gaining merely 30 pips, there is little reason to call this a genuinely positive development.

Most importantly, Warsh has recently supported easing rather than tightening. So did markets forget his current stance and merely replay his opinions from a year ago? That theory seems absurd. Hence, several conclusions follow immediately. The crypto market fell and lost several billion dollars in capitalization because it has been in a downtrend for the past five months; traders simply used the Warsh story as a pretext to trade with that trend. The stock market has been overbought for years and keeps hitting new records that do not reflect the real state of the US economy and politics. As for the dollar, there was essentially no durable reaction — there is so much negative pressure on the US currency right now that one appointment cannot fix it.

Wave picture for EUR/USD

Based on my EUR/USD analysis, the instrument continues to build an upward segment of the trend. Trump's policies and Fed monetary policy remain significant drivers of long?term dollar weakness. Current trend targets could extend as far as 1.25. At the moment, I believe the global wave 4 has completed, so I expect further gains. However, I anticipate a downward wave in the near term because the a?b?c?d?e series also looks complete. In any case, I would not recommend trying to trade the correction right now.

Wave picture for GBP/USD

The wave structure for GBP/USD has become clearer. A presumed wave 5 inside a larger 5 is still building, but the internal structure of the global wave 5 could be much more extended. I believe the current upward sequence is nearing completion or may already be complete. Consequently, a corrective wave (or a set of corrective waves) could begin soon, after which the main trend will most likely resume with targets above the 1.39 area.

Key principles of my analysis:

1. Wave structures should be simple and comprehensible. Complex structures are hard to trade and often change.
2. If you are not confident about what is happening in the market, it's better to stay out.
3. There is no such thing as 100% certainty about market direction — never forget protective Stop?Loss orders.
4. Wave analysis should be combined with other analytical methods and trading strategies.

The material has been provided by InstaForex Company - www.instaforex.com