Yesterday, the Federal Open Market Committee (FOMC), the Federal Reserve’s policy-making body, implemented yet another 75 basis point interest rate hike. While this move was perfectly in line with market forecasts, Chair Powell’s comments following the subsequent press conference, in which he discussed the FOMC’s new set of economic projections, were significant. He continued to emphasize the Fed’s commitment to bringing year-over-year inflation back down to 2%, even at the expense of short-term economic growth, offering little in the way of dovishness. These events may become key fundamental catalysts for further bullish USD price action and stock selloffs, hence why the new FOMC decision matters.
Top Pairs to Trade
Because the Federal Reserve has re-upped its commitment to contractionary monetary policy, which is favorable for the US Dollar’s value in the forex market, USD bulls have ever more reason for fundamentals to be on their side. The following pairs are among the EdgeFinder’s top recommendations for USD bulls, as can be seen with their respective ratings and biases/signals. The first three pairs have either broken through or just touched support, with potential breakouts to the downside seeming plausible. The fourth pair, USD/JPY, sold off today before finding some support, while even more buying pressure seems likely in light of the Bank of Japan's decision yesterday to continue their ultraloose monetary policy.
1) EUR/USD (Receives a -7, or ‘Strong Sell’ Signal)
2) GBP/USD (Receives a -6, or ‘Strong Sell’ Signal)
3) AUD/USD (Receives a -4, or ‘Sell’ Signal)
4) USD/JPY (Receives a 4, or ‘Buy’ Signal)
At 9:30 pm Eastern Time tonight, the Reserve Bank of Australia (RBA) will be publishing their latest round of monetary policy meeting minutes. While there is a chance that their intentions could come across as more hawkish than expected, they currently have little reason to be. Despite relatively low unemployment at 3.5%, steady GDP growth, and annual inflation having increased by a full percentage point to 6.1%, the Australian economy has not overheated in a manner comparable to that of other countries.
Because their inflation threat is not nearly as dire as that faced by the US, the UK, and the EU, the RBA’s 50 bp rate hikes understandably pale in comparison to the Fed and the European Central Bank’s 75 bp hikes, or the Bank of Canada’s willingness to utilize a full 100 bp hike. Because of this disparity in economic circumstances, there is a good chance that the RBA’s meeting minutes will favor AUD bears tonight as a fundamental catalyst. For those who are interested in watching this unfold or perhaps taking a position, here are 2 paths for Aussie bears, along with their respective EdgeFinder ratings and categories.
1) AUD/USD (Receives a -4, or ‘Sell’ Signal)
With big monetary policy decisions and economic projections coming on Wednesday from a hawkish Federal Reserve, there is a chance that significant bearish momentum could be coming. Institutional traders clearly have far more confidence in USD over AUD, as per COT data.
2) AUD/CHF (Receives a -4, or ‘Sell’ Signal)
The Swiss National Bank is expected to implement a 75 bp rate hike on Thursday, officially leaving negative interest rates behind. This marks a hawkish pivot that continues to set apart the Swiss Franc as a safe haven currency.
Bonus: AUD/CAD (Receives a -2, or ‘Neutral’ Signal)
Though perhaps less clear than with the two aforementioned pairs, the Bank of Canada’s approach to contending with inflation contrasts remarkably with the RBA’s, despite both CAD and AUD being commodity currencies. Also, Canada has a monthly round of CPI data due on Tuesday.
Forex traders had a fair bit of news to chew on this morning. All eyes were on the European Central Bank as they implemented an anticipated 75 basis point rate hike followed by a press conference, after which the world was treated to yet more commentary from Fed Chair Powell. Perhaps sliding under the radar was positive labor market news for CHF, with Switzerland’s unemployment rate beating expectations by falling to 2.1%. This joins a long list of reasons to consider going long on the Swiss Franc, as CHF might be underrated.
The Swiss Economy’s Strength
Switzerland boasts many economic factors weighing in its favor, including its hot labor market, CHF’s safe haven reputation, and GDP growth in spite of a recession-prone global economy. In many ways it is comparable to Japan’s economy, as both are high performing, export-heavy economies that are historically comfortable with negative interest rates due to low inflation relative to other countries.
However, one crucial difference between the two in terms of fundamentals is that the Swiss National Bank has proven willing to hike interest rates recently, whereas the Bank of Japan has thus far put off such a move. With Switzerland’s annual inflation still creeping up, currently hovering at 3.5% (a thirty-year high), more tightening could potentially be on the menu.
Best CHF Pairs to Trade
According to the EdgeFinder, A1 Trading’s market scanner tool, the following three pairs may be worth selling for CHF bulls. Here are the pairs, along with their respective EdgeFinder ratings:
1) GBP/CHF (Earns a -6, or ‘Strong Sell’ Rating)
2) NZD/CHF (Earns a -6, or ‘Strong Sell’ Rating)
3) AUD/CHF (Earns a -5, or ‘Sell’ Rating)
The next few days will likely be full of unusual degrees of volatility in both the forex and stock markets. Let’s discuss why, and how to prepare for it, as we issue an urgent warning: Jackson Hole is here.
What is Jackson Hole?
The Jackson Hole Economic Symposium, often simply referred to as ‘Jackson Hole’, is an exclusive, three-day annual conference sponsored by the Federal Reserve Bank of Kansas City. Held in Jackson Hole, Wyoming since the early 80s, the conference is an extremely significant event for traders and investors, as it is attended by many of the biggest movers and shakers in the global financial markets. Invites are reserved for influential investors, prominent government officials, economists, and central bankers, and media coverage of comments and speeches at the event can heavily influence market sentiment and price action.
Potential Impact on Major Pairs
Jackson Hole is an extremely difficult event to prepare for because coverage is extensive, and any number of off-hand remarks could have dizzying unexpected consequences. With the conference kicking off today, traders should take caution since the forex and stock markets could easily become the wild west over the next few days, with any number of catalysts surfacing.
Tomorrow at 10 am Eastern Time, Fed Chair Jerome Powell is set to give a Symposium speech on economic outlook which will likely address the dual problems of inflation and recession, wherein he will offer hints at Fed policy plans. Depending on whether his remarks are interpreted as hawkish or dovish, this could potentially cause USD to either plummet or soar against other currencies. With a smaller Q2 US GDP contraction than originally estimated, and Core PCE Price Index (the Fed’s preferred measure of inflation) numbers also coming out tomorrow at 8:30 am, traders, Powell, and conference attendees will all have much to chew on.
Possible USD Setups
According to the EdgeFinder, A1 Trading’s market scanner tool that helps traders conduct analysis, here are three of the top-rated pairs to sell for USD bulls. All three have recently hit key support zones, though no breakouts from their clear downtrends have yet to occur. If Powell comes across as particularly hawkish tomorrow, this could prompt breakouts to the downside, and continuation for the existing downtrends. However, if he comes across as dovish, we may see support hold, along with breakouts to the upside, disrupting these downtrends.
At 2 am Eastern Time today, the United Kingdom’s Office for National Statistics reported that annual inflation has officially crossed into the double digits for the first time since 1982. In July, year-over-year CPI in the UK beat expectations by rising 10.1%, while year-over-year Core CPI (which excludes volatile food and energy prices) similarly beat market forecasts by increasing 6.2%. While high inflation of this magnitude is typically a bullish indication for a currency, implying rampant growth which must be slowed through higher interest rates, there is reason to believe that is not the case here. This is primarily because a) the UK’s economy is contracting, and b) the Bank of England has thus far been too timid to be effectively hawkish. With this in mind, let’s discuss the EdgeFinder’s top 4 pairs to sell today, which happen to all be GBP pairs.
This pair makes the top of the bearish list, earning a -8 or ‘strong sell’ signal from the EdgeFinder. This is because the US economy’s fundamentals are better than the UK’s (except for severity in GDP contraction), trader sentiment heavily favors USD, and both trend reading and seasonality (historical performance this month) indicate bearishness.
This pair also earns a ‘strong sell’ signal, or -6. Most variables favor CHF due to the Swiss economy’s resilient performance in contrast to that of the UK. COT data and interest rate divergence are the only categories that don’t support this signal because institutional traders have similar sentiment regarding these currencies, and the Swiss National Bank has not had to confront high inflation.
Earning yet another -6 or ‘strong sell’ signal, all categories but two favor CAD due to Canada’s economic stability and hawkish central bank. Only seasonality favors GBP, along with the UK’s superior unemployment rate (currently 3.8% to Canada’s 4.9%), though Canada’s has been declining.
This pair earns a milder, but still significant, ‘sell’ signal at -5. All listed fundamentals lean in AUD’s favor, while both institutional and retail sentiment remain neutral, with only seasonality supporting GBP.
Tomorrow, the UK is going to announce their monthly adjusted GDP for July. Pound pairs are volatile today while uncertainty and doubt in the central bank's policies going forward. The direction of GBP will likely be shaped by tomorrow's numbers, but here are some factors to consider.
If the UK announces a fall in GDP, which is expected, the BoE might have to start loosening up on the pound. Deterring focus from the strength of their currency would result in a stronger economy. The downside to that is an acceleration of inflation.
The expectation is a considerable drop from June, so we could see a beat in forecasts while still looking at a lower growth in output. Either way, it looks like the UK is in for some bad news.
Another thing to consider is that the equities market in the US getting stronger each day on good inflation and jobs numbers within the past week. There is a strong correlation between the British pound and the S&P 500 index. If equites continue to rise, GBP could ride on the coattails.
It's now much tougher to tell where stocks are headed as well. Investors do see a light at the end of the tunnel, however, rates will only continue to rise. The question of whether or not the US is still experiencing a bear market rally or entered a new bull market is still up in the air.
GU rises with US equities as investors wait for GDP numbers to come out tomorrow. The pair is coming up near resistance around 1.22961. If GDP comes in lower than last month, investors might think that BoE will have to reduce hawkishness to focus on economic growth. This would likely take the pound lower, although a strong US stock market is carrying GU with it.
A big break in support on pound-aussie looks extremely bearish for the pair. If this candle closes below the 1.71748 level, we could expect further downside for some time. A new level of resistance looks to be in the making on the 1D timeframe which would be a tough level to break back above.
Pound-CAD looks weaker too. Price fell lower on the 4H timeframe as it nears the falling trend line for support. Lower highs and a fail to test resistance suggest weakness in the pair. Price may come down to test 1.55075 should we see another sell off.
Consumer Price Index numbers will come out tomorrow with the anticipation of a slowdown in inflation. This index takes all goods and services purchased by consumers and measures their prices against the previous month. Investors will get an idea of whether or not the Fed is staying the course, too aggressive or too loose. Here's why you should trade these pairs before tomorrow.
The RBA fears slowing the economy should they continue to raise their rates. Unlike the US, Australia is not showing positive growth in jobs or output which is hinting towards their central bank taking a less hawkish approach and lessening the rate hikes. Investors are looking towards weakness in the buck and are looking for further downside on this pair.
AU just came back up to test a falling trend line on the 4H which it couldn't break above. The pair is also in a fib resistance zone while forming lower highs. Price may start to move downward towards the 0.69125 level where there are a couple bottoms.
After a handful events in the UK, the value of the pound is very much up in the air. Uncertainty clouds investors' grim outlook on the economy and currency. British GDP numbers are expected to come out lower and even negative, which compared to last month, was 0.50%. This will also give us an indication of whether or not the BoE will keep hiking as much as they have, or if they'll take their foot off the pedal for a while.
Should lower GDP numbers come in for GBP, we can expect the pair to turn lower. On the 1D timeframe, price is showing another day of rejection from the highs of the day. Price may continue lower to test the falling trend line. We can see a move as low as the bottom at 1.17631.
UJ has been a volatile and unpredictable pair for the most part this year. Long term, we might be able to expect a stronger USD over the yen although both currencies are considered risk-off. Latest NFP numbers suggest that the Fed can keep hiking rates. And tomorrow's CPI might further indicate that argument's validity.
The pair has not really moved this week but has stayed just above a previous resistance level around 134.597. A move down could lead price to hit the rising trend line on the 1D timeframe, while an upward surge could take the pair all the way to the highs of 138.700s.
After Non-Farm Payroll numbers came out, we are seeing some higher bullishness on the dollar. Actual beat the forecast of 372K jobs expected. Here is why the dollar is stronger and which pairs have the best USD setups going into next week.
The Fed has more breathing room to raise rates now that jobs numbers are increasing. Less concern over contractions and layoffs has finally showed relief in the market. This unexpected jump in employment figures was a very bullish indicator for the economy and dollar strength.
Powell has already pointed towards higher rates later this year. He also stated that investors should be expecting 50-75 basis point hikes, and the latest NFP made this statement more concrete.
GU broke under a clean support level on the 4H and 1D before testing the long term falling trend line. Lower lows suggest more downside while dollar strength increases. Price could bounce from here, but momentum might not be strong enough to take it much higher.
AUDUSD is in a similar boat as the pound and is showing more pressure towards the downside. On the 1D, price came down to test support on a falling trend line while there is an additional level right below that. Lower lows also suggests more downside for the pair.
UJ fell back onto clean support on the 1D timeframe and took off from there. Price's recent jump into the 135s might look like the gains have run its course, but we may end up seeing a test around the 138-140s in next week's trading sessions due to the break above the trend line again and a higher high.
The UK hiked interest another 50 basis points this morning. Rates are now at 1.75% and inflation is still projected to be much higher next quarter. Here is our outlook on the pound and where we think it will be going in the future.
As output decreases and inflation sits at highs from the 80s, forecasts are now expecting that the economy will enter a recession this year. Growth has not been very impressive in 2022 as contractions continue to fuel bearish sentiment in the UK..
It also looks like the pound is struggling with these aggressive hikes, similarly to the euro. BoE is still dedicated towards the inflation curb, but the economy may suffer as a result.
Analysts also expect inflation to finally reach its peak in October of this year at 13.3%. This will take years to eventually come down to reach its 2% target.
GU bounces off support on the 1D timeframe again and is coming up to the break even level. The recent break above a falling long term trend line is a bullish sign for the pair for a potential momentum shift. Resistance sits at 1.23110. If price breaks under current support, we could see the pair move lower towards 1.19400s.
GBPJPY falls lower on the 1D after the BoE's rate hike decision. Price got rejected from the highs as it retraced from resistance. The pair might try to move lower to test 159.500 if the downside continues. After the recent break under a supportive trend line, we could see a shift towards a downtrend as pound weakness continues.
GBPAUD has been channeling sideways since April which is a promising setup on these supply and demand zones on the 1D timeframe. After each test on the low, the pair eventually makes its way back up to the 1.77000s. So, this pair looks to be a good channel trend play.
The dollar is weaker today as the US is set to announce their seventh Non-Farm Payroll this year. Economists and investors alike anticipate this news to see whether the jobs market and output is going to come out with signs of retraction again. Here are some concepts followed by some of the best setups for USD pairs before Friday's NFP.
The US expects to report yet another decline in output during this recessionary period. Forecasts say that the number of jobs added in the month of July will be 122K less than in June, marking the fifth contraction in a row.
Although monthly growth is exceeding analyst expectations, the rate is still slowing down. Investors should be keen not to be fooled by a beat in forecasts if GDP is still declining. On top of that, the unemployment rate is expected to increase as well by another 0.1%.
This could spell weakness for the dollar, even as interest rates rise. So, here are a few setups that we think are the best going into the week bearish or bullish.
UJ continues to slide on a strong yen as the BOJ decided that no intervention was required to find economic growth. The overall trend is still on the upside for the most part, but signs of a shift in momentum just happened on the 1D timeframe. Price broke under a long term trend line and is headed toward support around 131.407. Additional support doesn't look clear until the 125.100s-126.300s.
NZDUSD shoots higher on the day as the dollar sinks from weak outlook. Price has already broken above a falling trend line and is pushing towards resistance around 0.63918. Further resistance lies above around 0.65505 should price break higher.
GU inches toward resistance around 1.23300s. Its correlation to the US stock market has reflected price action and will likely continue its trend upward until the SPX500 turns the other way. Up until NFP, the pair may rise higher towards 1.233 and 1.244 which is another level higher. It is unclear whether or not the bear market has ended, but price looks like it will continue to rise going into Friday's report.