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As this week comes to a close, we are looking ahead at future setups that could be some of the best opportunities for the next several trading sessions. Here are some pairs for next week that we are looking at.

EUR/JPY

pairs for next week

Recent data has shown a slow down in the German manufacturing sector. With European economies still working on a recovery, the ECB is hesitant to raise rates, but plans on doing so this summer. However, Japan is experiencing the same thing, yet they are far off from raising rates.

EURJPY looks strong on the 1D and 4H timeframes after a strong uptrend for the past week. Price has support in the 141s as well as the rising trend line on the 4H. The 50 and 200 simple moving averages are also promising support levels for the pair should price move lower. The Edgefinder has even ranked it the highest buy rating at +5.

GBP/USD

pairs for next week

GBPUSD is another setup that looks promising to the short side. Both the US and UK are fearful of returning to a recession after stagflation. The only difference is that the USD is what investors see as a safe haven while the pound is more speculative. The US is also outpacing England in their attempts to raise rates and curb inflation.

On the 1D timeframe, this pair found a new low and is slowly working up from that level. There is a falling trend line that could serve as resistance as it is also paired with the 61.8% fib retracement zone. Just above that, is the 50 DMA of mild resistance, while the 1.26670s serves as a double top. These were the three short opportunities that look promising. The Edgefinder ranks this pair as the strongest sell rating at -7.

USD/CHF

pairs for next week

CHF is strong, but the USD is stronger. The SNB's recent decision to hike rates pushed this pair lower while risk-on sentiment added to the dollar sell off. This was an unexpected decision and was the first time the bank hiked in over a decade. The Edgefinder actually ranks this at a -3 sell rating.

The double top on the 1D timeframe suggests heavy resistance as price retraced hard underneath it. However, the pair may have found support on the 61.8% fib level. There is also some additional support below that around 0.94628. The fact that the pair did cross underneath the rising trend line is a bearish sign, so price may continue lower in the meantime.

The historically 'safe' currency to hold in times of recessions is in a unique situation now with a couple factors in place. Here is why the yen is stronger today as well as some trade setups that could push its value either up or down.

Weaker Yen Now, Stronger Yen Later

The Bank of Japan has been consistently keeping the yen in a weaker state for a long time now as interest rates still remain negative. Keeping yields low and easing is all part of the process to bring strength back to Japan's currency over time. A major focus that BOJ governor, Haruhiko Kuroda, is economic recovery, so spending must be ample.

The yen is also subject to volatile swings in either direction. And as long as rates keep causing depreciation, investors will likely be short. However, should investors see a light at the end of the tunnel (which could be happening now), JPY might be priced higher and cause a surge in price.

Against the USD, however, it may not find a good enough advantage than if it were to be paired against a country like Canada, Europe or UK. Here are some setups that could be bullish for yen should the rally continue.

Yen Setups

GBP/JPY

yen

Pound-yen can't seem to break above what is now a triple top on the 1D timeframe. The pair seems to be ranging from the upward trend line to this top which is creating a sort of wedge pattern. The yen's recent strength could take price back down to the trend line for a third test.

CAD/JPY

yen

CADJPY works its way down as oil demand weakened and BOJ hints at working towards tighter policy. Price is nearing support around 102.700s with additional support from a rising trend line on the 1D timeframe. A break under this trend line could take price lower towards the 98.400s.

EUR/JPY

yen

EJ looks similar to GJ except for the double top on this chart. Price came down today and is also nearing a rising trend line paired with support on the 1D timeframe. Price could come down to test those levels again. Now that there is a double top, price may struggle to break higher than the 144s.

Tomorrow and Thursday will likely be the most volatile days for the USD this week because of the testimony given by Jerome Powell. Here are some things to look out for as well as a couple trade setups that could lead to huge market swings either up or down.

Bullish Case For USD

In order for the USD to be more bullish, investors need to be more fearful of a recession as well as further tightening monetary policy. Because inflation is so high, analysts fear that it may take years before we come back to the Fed's original target of 2%. Powell may make remarks about this in the upcoming testimonies, and it would be very important to listen for this when we trade.

usd
https://www.forexfactory.com/calendar?week=jun12.2022#graph=123024

Powell will also address current policy towards the inflation cap where he will either stay the course or loosen up for expansionary reasons. If he says that the 75 basis points hikes are likely to continue, we may start to see another rise in USD. The original plan was to bring rates up by a quarter of a percent each time, however, this changed to half and then three-quarters of a percent in the most recent hike.

Bearish Case For USD

Should Powell state that in terms of the economy, the US is doing better than they thought, the price of the dollar might fall. Additionally, if Powell says that the economy is in trouble and the Fed wants to loosen policy, we also might see a fall in USD.

usd
US unemployment rate

The US unemployment rate is another thing to look out for as jobless claims come in on Thursday. Higher unemployment usually means bullishness for the dollar. However, now investors might be looking at higher unemployment/higher jobless claims as bearishness for the USD. This is because the worse the US economy is doing, the more likely it is for Powell to take a less hawkish stance toward the dollar and raise rates at a slower and lesser pace.

USD Trade Setups

USD/CHF

usd

This pair on the 1D timeframe has come down to support on a rising trend line. Price also hit the 50% fib level and has been showing considerable rejection from the lows in each of the last three trading sessions. If price bounces from here, we might see the pair go back up to the double top it established in the week before above 1.00000.

GBP/USD

usd

Pound-dollar is barely up today after a weak rally to the upside. A strong falling trend line sits right above price which may serve as a short opportunity on the 1D timeframe. Today's candle is already showing signs of rejection from the highs, so there might be selling pressure in the near future depending on how this candle closes. Should price retrace, it could come down to test the lows of 1.19520s.

EUR/USD

usd

EURUSD inches higher with the stock market today although momentum is not very strong at open. Price is nearing resistance around the 50 DMA with a 1.07600s resistance level right above that. Lagarde plans to hike twice this summer but the US has already hiked 3 times and plans to reach over 4% interest by the end of the year. This gives USD a bullish advantage over the euro.

After a volatile week of trading, we look to Monday as we attempt to forecast the week ahead. There could still be some rocky sessions ahead. So, here is some fundamental analysis on our trading biases towards the USD major pairs.

EUR/USD

Bias: Bearish

major pairs

The euro has given back some of its gains this morning as risk appetite fades once again. The rumored 75 basis point hike on the US dollar became expected and brought some hope to investors. On the other hand, the ECB is not expected to raise rates any time soon which has investors concerned for the euro. Risk-off still remains dominant in global markets, so the euro-dollar pair may continue to decline in the meantime.

GBP/USD

Bias: Bearish

major pairs

Inflation in both the US and UK have reached 40-year highs while their central government’s take increasingly hawkish stances on their currencies. However, the Band of England couldn’t mimic the same hike in rates as the Fed which could be considered bearish for the pair. Both countries are in similar economic conditions, so it looks like the USD will be preferred over the pound because the UK couldn't match the Fed’s 75 basis point hike.

AUD/USD

Bias: Bearish

major pairs

Aussie-dollar showed very similar price action behavior towards the FOMC decision and is now giving back most of its gains from the last two trading sessions. Fundamentals for this pair are the same for EURUSD and GBPUSD. The dollar looks stronger due to the more combative approach by the Fed than other countries. 

USD/CAD

Bias: Neutral, Bullish-leaning

major pairs

The dollar has been extremely bullish against the loonie as oil prices decline. The commodity-driven economy has been showing more growth than in the US as the Canadian central bank works towards tapering while continuing with their tight policy. With the current shortage in supply and high demand for oil, Canada might still be able to have a leg up on the dollar, so the pair may have some volatile oscillations.

USD/CHF

Bias: Bullish

major pairs

Dollar-swiss sank prior and during the SNB’s rate decision that brought interest from -.75% to -.25%, a 50 basis point increase. Yesterday’s drop could have been overblown as the USD still remains strong in many aspects. However, the Swiss Franc does look strong when matched against currencies like the yen, the euro, and buck which are lagging on their monetary tightening process.

Global inflation, company layoffs, economic sanctions, geopolitical conflicts and so on have investors shuddering from the thought of investing. Volatility has picked up well beyond expectations as recession fears loom in the forefront of everyone's mind. With all these issues, it's hard to tackle markets when we have been so used to different monetary policy, risk-on sentiment and economic growth. As the FOMC meeting is just over the horizon, it is important to brush up on key concepts to help us prepare for market uncertainty. So, here are some ways to make money trading during turbulent market conditions.

Trade Risk-Off Pairs/Buy USD

What Does Risk-Off Mean?

Due to ever-changing market conditions, examples of risk-off pairs tend to change as well. Risk-off currencies basically are the ones that perform better in times of uncertainty, economic struggles, hawkish monetary policy or high inflation.

Here is a list of risk-off currencies that tend to do better in recessionary times:

Historically, these currencies have been considered 'safe haven' investments when the economy is suffering. USD has always been a safe haven because of the Federal Reserve and their decisions impact the global financial market. Ever hear of people making Swiss bank accounts to shield their money (or keep it hush-hush)? The Swiss Franc is considered risk-off because of it expendability with debt. As a constantly profitable and small economy in the financial sector, the Franc never really gets into deep waters like Germany, United States, Canada, Euro-Area, etc. which are much larger economies. Lastly, when US stock markets fall, the yen tends to appreciate, making JPY a historically profitable play in poor economic conditions.

What Pairs Will Move Up/Down During A Recession?

Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:

Bullish

  • USD/CHF
  • USD/JPY
  • XAU/USD

Bearish

  • GBP/USD
  • EUR/USD
  • AUD/USD
  • NZD/USD

You might have noticed that USD/CAD is not on the list. That is because the Canadian economy has been very strong as of recent. Their jobs data is better than the US and most other countries while the oil-dependent economy has benefitted from sanctions on Russia and supply-chain shortages. Overall, if the energy crisis on oil continues, the loonie will persist, but if oil prices fall, USD will overtake CAD.

Because of the Fed's impact on the world financial system, USD will continue to be strong especially if it's central bank continues to raise rates like it has been doing so far this year. Gold is also on the bullish list because of its extraordinary circumstance. Due to reasons mentioned in this article about gold, we think a recession would be a good opportunity to start building positions on gold for the long term.

Making Money Trading In A Recession

The process of trading in a recession can either be through the use of short term or long term plays. GBP/USD and EUR/USD tend to follow the US stock market (SPX500 or NAS100). If you have ever traded these indices, you would know how volatile they can be on a regular basis. This volatile behavior is mildly reflected on the pound and euro when it is up against the USD, but the correlation is generally the same as the SPX500. If one was to trade GBP/USD or EUR/USD, quick short plays might be the best option. Ranging plays would also work, but there might be heavy ups and downs along the way.

All forex pairs enter into long-term swings either to the upside or downside. But, some pairs like to take exuberant amounts of time in a single direction before changing course. These pairs are AUD/USD, NZD/USD, USD/CHF & USD/JPY.

Similar to the pairs just mentioned above, gold is another example of an asset that takes a long time to move, allowing for investors to build large positions over time. Commodities like gold also tend to perform their best during economic declines.

FOMC economic projections, a statement from Powell, and the interest rate decision is happening tomorrow. The forecast has already been out for a while, however, there are some speculations as to whether the Fed is going to get more aggressive or not. Here is what we think and what to consider, as well as what might happen if the rumors are true.

The Rumor

FOMC
USD Federal Funds Rate Previous and Expectations

The US central bank is set to raise interest rates multiple times this year, and they have already done so for the past several months. So far, we've seen two hikes since <0.25%; one took funds to 50 bp and the second took it to 100 bp (1%).

With inflation as out of control as it is, economists speculate that the Fed will try their best to step in front of it but will need to take a more offensive approach. Rumors of a 75 bp hike were floating around, but it is not to say for certain that this will happen. However, here are some reasons as to why we could such a boost tomorrow.

Economic Slowdown

To reiterate some points from yesterday's article on gold and why it could be a better pick than the dollar, the US economy is experiencing a slow in GDP growth as businesses and consumers alike are cutting back on their spending. Workplaces have been conducting a concerningly higher number of layoffs in the month of May and June.

The problem the US and most of the world is facing are consequences from quantitative easing stemming from the pandemic in 2020. Inflation has hit a 40 year record and there doesn't seem to be any sign of stopping. Thus, if the Fed really wanted to advance in this assailment on lowering CPI, three quarters of a percent might be justified.

A Double-Edged Sword

What makes this circumstance so complicated is that the Fed doesn't want to abandon their 'soft landing' strategy where the market can ease into the waters while slowly adjusting to new monetary policy. If this shift happens too fast, the economy might enter into a recession- businesses will have to cut back on their employees and spending. However, if they don't act quick enough, inflation will force companies and consumers to cut back expenditures as well.

FOMC
The relation between funds rate, unemployment and personal expenditures

Holistically, policy needs to hit a sweet spot, but it's tough to find that middle ground. Considering what is going on right now in the market (jobs in May and June have cut several thousand workers at an alarmingly higher rate than the past 6 months), the Fed is running out of time and options. It's probable that the bank will go for this inflation curb ASAP and have to deal with the negative outcomes that follow in the short term.

Setups For FOMC

USD/JPY

UJ pushes higher today as investors anticipate the open market committee's decision tomorrow. Price climbs higher towards the 135.200s on rocky behavior in recent days. A supportive trend line lies below with a support level right beneath that.

EUR/USD

EU returned the gains it made in the last couple days off a bounce from mild support on the 4H. Price looks like it might be able to continue a move lower to the 1.03700s support zone. Momentum is so hard to the downside that the pair might complete this move to support before seeing any kind of bounce.

AUD/USD

AU is similar to EU as it looks to complete that move to the downside on to support in the 0.68500s. Heavy resistance has kept the pair from being able to shift momentum as it is currently in a steep decline from the June highs near the 0.73000s. Price will likely test that bottom before seeing any kind of move to the upside with potential. It might even break to lower lows.

Key Economic News on June 14th

Most weekdays offer the release of a flurry of economic data that can influence price action in the financial markets. Due to the surplus of information available, it can be difficult to parse and locate which indicators are most helpful in terms of fundamental and sentiment analysis. Here, we consider key economic news on June 14th, which I will be keeping in mind for identifying fundamental catalysts, preparing for future volatility, and devising trade setups.

GBP: Another Day of Bad News

The United Kingdom received disappointing new unemployment and employee earnings data from the Office for National Statistics this morning at 2 am Eastern Time. The UK’s Average Earnings Index failed to meet forecasts, while the unemployment rate ticked up by an unexpected 0.1% as more workers filed for unemployment benefits than anticipated. This comes on the heels of yesterday's pessimistic news for the UK, including a shocking month-over-month GDP contraction and a worse trade deficit than what was forecast.

Things are not looking up for GBP; the UK’s economy is clearly not performing well, yet the Bank of England (BoE) is forced to attempt to reckon with high inflation numbers while not causing a recession. This is holistically bearish for GBP, with a mild 25 bps rate hike and Monetary Policy Summary from the BoE expected on Thursday at 7 am Eastern Time. Traders could look to continue shorting GBP beforehand, wait for Thursday's fundamental catalyst(s), or perhaps attempt to buy GBP/JPY as the pair may be erroneously oversold on GBP disappointment.

Other News

Month-over-month German CPI data came in at precisely what was forecast, 0.9%; however, economic sentiment in Europe came in bleaker than expected today according to the ZEW survey(s). US Producer Price Index (PPI) numbers, another metric for inflation, also met forecasts at 0.8% month-over-month, though Core PPI (which excludes food and energy prices) failed to meet expectations by 0.1%. However, this is secondary for USD as tomorrow’s FOMC news remains the focus. China’s year-over-year retail sales and industrial production numbers are also scheduled to be released tonight at 10 pm Eastern Time, along with their unemployment rate.

Key Takeaways

Why I Day Traded USDCHF

Price action for USD pairs was fascinating today as the DXY reflected bearish momentum that saw a low of nearly 102.15 intraday. This selloff was stopped at approximately 8:30 a.m. Eastern Time when eager buyers sent it soaring, eventually over the 103.3 level. Several factors were at play here, including important European Central Bank news and expectations for new US CPI data tomorrow. I took this opportunity to trade USDCHF this morning; it went well, and I entered and exited the trade in under an hour. Below I explore my process, and why I day traded USDCHF.

Fundamental Analysis

In many ways, the fundamentals favor CHF: Q1 GDP growth in Switzerland was positive unlike for the US, unemployment is 1.5% lower than in the US, and year-over-year inflation is gradually climbing. However, the Swiss National Bank currently has its key interest rate at -0.75%, compared to the Federal Reserve’s 1%, which involved a 50 basis point rate hike. On top of this, both CHF and USD are historically safe haven assets, and USD has encountered recent bearish data and increased chances at volatility due to upcoming US CPI data (perhaps indirectly through today’s ECB announcements as well). Thus, I decided I felt comfortable enough to go long on USDCHF as a day trade, but not confident enough to sit in it for too long.

Technical Analysis

I felt that there were enough technical indications here to warrant a brief long position. On the 1-hour timeframe, the price moved rapidly outside the Keltner Channel walls, and met significant support in two places: the 0.972 zone and the trendline pictured. I interpreted this bearish candlestick as a hasty reaction to meeting resistance around 0.98 (a reaction that could be short lived in light of potential for USD volatility). Thus, I entered at the 0.973 level, and took profit just above the 0.978 level, since I was not confident it could break through 0.98 resistance.

Sentiment Analysis

Sentiment analysis also made me feel comfortable entering the position. According to A1 Trading’s EdgeFinder, recent COT data reveals 76% of institutional traders going long on USD, whereas just over 10% are going long on CHF. In contrast, less than 1/3 of retail traders are long on this pair. These are all incredibly bullish signs for USDCHF, making me feel confident in my purchase, especially as Switzerland grapples with neighboring eurozone issues and with today’s arguably banal ECB decision. However, given my aforementioned uncertainties about the pair’s fundamentals and mutual safe haven status, I still planned on an early exit.

Key Takeaways

Key Economic News Today

Most weekdays offer the release of a flurry of economic data that can influence price action in the financial markets. Due to the surplus of information available, it can be difficult to parse and locate which indicators are most helpful in terms of fundamental and sentiment analysis. Here, we consider key economic news today, which I will be keeping in mind for identifying fundamental catalysts, preparing for future volatility, and devising trade setups.

Euro Area: Monetary Policy Statement & ECB Press Conference

This morning the European Central Bank (ECB) made plain their monetary policy intentions: they will be ending their quantitative easing program with the start of July and implementing an interest rate hike of 25 basis points that month as well, with another identical hike scheduled for September. This caused a great deal of volatility for EUR this morning, with buying pressure spiking before quickly being overtaken by bearish momentum. This is likely because, despite a change in tune from the ever-dovish ECB, the markets had already anticipated these plans, and the ECB’s key rate will remain in the negative even after July’s hike.

United States: Unemployment Claims & Natural Gas Storage

The past week saw 229,000 American workers file for unemployment claims, while only 205,000 claims had been forecast. An additional 97 billion cubic feet of natural gas was held in US storage this past week as well. Both data suggest a slowing US economy with more unemployment and less consumer spending, which is bearish news for USD. However, this information is merely the prelude for tomorrow’s CPI and Core CPI data month-over-month, expected from the Bureau of Labor Statistics at 8:30 a.m. Eastern Time. With economic health teetering in response to the Federal Reserve’s pivot towards hawkishness, tomorrow’s inflation data may be a significant fork in the road for USD. The DXY is currently surging today, clearing and then hovering around the 103 level intraday.

Canada: BOC Financial System Review

This morning the Bank of Canada (BOC) released their annual Financial System Review, in which they analyze Canada’s economic wellbeing and any significant threats they are wary of. They revealed particular concern about the effect of rate hikes on the global economy, as well as its effect on those in Canada contending with high household debt and a hot housing market. While they covered a broad variety of topics including cybersecurity and climate strategy, I personally interpreted the report as being rather dovish, though they did express less concern about the effect of rate hikes on Canada’s non-financial businesses. This may have prompted some of the CAD bearish momentum we saw this morning.

China: CPI (year-over-year)

Due tonight from the National Bureau of Statistics of China at 9:30 p.m. Eastern Time, China’s CPI is expected to hit 2.2% year-over-year, though CPI data from the past two months have surpassed forecasts. Considering yesterday’s report on China’s monthly trade balance exceeded forecasts by over $20 billion, it seems plausible that tonight’s CPI data will likewise reflect a booming economy. Though CNY functions somewhat differently than other currencies due to more centralized control of its value and limited access for traders and investors, it is helpful to monitor China’s economy as its performance has global implications regarding trade imbalances and industrial competition.

Key Takeaways

The dollar started showing weakness on some pairs today as investors anticipate a higher rise in inflation tomorrow. USD is looking especially weak against the pound, yen and swiss as dollar sinks against the swiss by over half a percent. Because of this mixed sentiment, here is a forecast of what we think the dollar pairs might do going into tomorrow's inflation report as well as next week relative to the currencies it trades against.

EUR/USD

ECB was expected to keep interest rates at 0% which came in as expected this morning, so no surprise here. Interest has been negative for a long time, so zero is a step in the right direction, but it is also not very promising when going against the other majors like the dollar, kiwi, loonie or even pound. Economists do expect to raise rates in July though, so traders might be pricing in the future hikes which are targeted to hit 1.3% by the end of 2022.

Our bias: There is a pretty strong correlation to the S&P, just like GU, so the thought of risk off sentiment and higher euro rates could be bullish for the pair. It would also depend on how CPI goes tomorrow on the USD. Higher CPI would mean Fed will try to stay the course, strengthening the dollar, but falling inflation could loosen up the Fed and weaken the dollar.

GBP/USD

With surging inflation in the UK, the pressure is mounting on the pound. The BOE is shooting for around the same interest rate as the ECB, at 1.38% by December. Boris Johnson survived the governor confidence vote, but the pound is now looking really weak from a fundamental standpoint. The Edgefinder thinks the pound is a strong sell which is concerning, especially as economists think inflation will hit 10% this year before curbing.

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Our bias: The question is whether the BOE is too aggressive on the pound during a recovering economy, or if they’re not aggressive enough to curb inflation. Outlook is weak on this currency, so the pound might suffer in the meantime.

USD/CAD

Canada’s version of Non-Farm Payroll comes out this Friday with the expectation of adding 28K jobs, which is 13K jobs more than the month before (economic expansion). Their bank is also aggressively hiking rates as well. Last week’s hike was 50 basis points while oil rises on supply chain issues with sanctions regarding Russia and Ukraine. So it’s helping out the commodity driven economy.

Our bias: Canada is like a powerhouse right now, I would not go against this pair. You’d be a loonie to short the loonie.

USD/JPY

The yen sank to 20 year lows while BOJ governor, Haruhiko Kuroda says he's not going to loosen his hawkish stance towards interest rates. They also left the key short term interest rate the same (-0.10%) which doesn’t seem very productive especially if the bank is trying to be hawkish.

Our bias: The yen is likely not going to be bullish for an extended amount of time at any point soon.

XAU/USD

The long standing war in Ukraine continues to drive up commodity prices due to supply chain issues and geopolitical tension. Gold’s performance also depends on whether the US economy slows down, so unemployment claims are something to look at as well as NFP, but NFP beat expectations last week. Bond yields and gold’s price go hand in hand and the US 10-year note touched above 3% today, suggesting weakness in the metal.

Our bias: We are mostly neutral on the metal and I think there are better things to trade right now.

SPX500

Bond yields also heavily affect the stock market as well as jobs data. Depending on CPI this Friday, the S&P will either look bullish or bearish for the rest of the week and going into next week. If CPI is higher, that would not be good for stocks in my opinion bc it will encourage the Fed to remain strong on the USD, especially with the beat in NFP last week. But if CPI is lower, maybe the Fed will start to tapering with the idea of relaxing their heavy hawkish stance.

Our bias: The SPX500 never really came down to hit a bottom before bouncing, and it never really hit any resistance before it retraced. So, I don’t really know where it’s going to end up. But I do see lots of bullish setups in the short term. Just looking for quick bounces and dipping out before the market gives it all back.

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