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Why the New FOMC Decision Matters

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)

Why the New FOMC Decision Matters
Why the New FOMC Decision Matters

2) GBP/USD (Receives a -6, or ‘Strong Sell’ Signal)

Why the New FOMC Decision Matters
Why the New FOMC Decision Matters

3) AUD/USD (Receives a -4, or ‘Sell’ Signal)

Why the New FOMC Decision Matters
Why the New FOMC Decision Matters

4) USD/JPY (Receives a 4, or ‘Buy’ Signal)

Why the New FOMC Decision Matters
Why the New FOMC Decision Matters
USD Still Strong from Inflation

This morning, at 8:30 am Eastern Time, the United States’ Bureau of Labor Statistics revealed that inflation had once again beaten expectations. Market forecasts had anticipated a 0.1% decrease in month-over-month CPI in August, whereas a 0.1% increase was the result. However, even bigger news was month-over-month Core CPI coming in hot at 0.6%, double the 0.3% increase that had been forecast.

With annual core inflation in the US currently sitting at 6.3%, sharp declines in volatile energy prices are still not enough to bring the country’s inflation train to a screeching halt. This gives the Federal Reserve further incentive to continue raising interest rates, which manifested in a surge of buying pressure for USD this morning as the US Dollar Index jumps 1% intraday. With even a technical recession and a rising unemployment rate unsuccessful in completely mitigating economic overheating, USD bulls may have fundamentals on their side for the near future.

Three Great Major Pairs

The following major pairs are ranked favorably for USD bulls by the EdgeFinder, A1 Trading’s software tool that provides supplemental analysis. Based on criteria ranging from fundamentals to trader sentiment, those who are bullish on USD may want to watch these pairs for potential opportunities to go long on the Greenback:

1) EUR/USD (Receives a -5, or ‘Sell’ Signal)

USD Still Strong from Inflation

2) GBP/USD (Receives a -5, or ‘Sell’ Signal)

USD Still Strong from Inflation

3) USD/JPY (Receives a 4, or ‘Buy’ Signal)

USD Still Strong from Inflation
3 Ways to Sell JPY

The Japanese Yen has continued to plummet in value in the forex market, recently hitting a low not seen in twenty-four years. It appears as if the Bank of Japan (BoJ) will not budge on monetary policy as negative interest rates continue to be the norm for the foreseeable future, despite vocal concerns from Japan’s government. As the BoJ’s relentless dovishness continues to set it apart from increasingly hawkish central bank contemporaries, many traders resume shorting the Yen. Let's discuss 3 ways to sell JPY.

How Long Can the BoJ Hold Out?

While much of the developed world is focused on frantically quelling high inflation rates through contractionary monetary policy tools like rate hikes and quantitative tightening, Japan is not. Rather, the BoJ is in the unique situation of perpetually trying to stimulate Japan’s economy to prevent deflation and create growth. Considering that the BoJ has been striving for at least 2% annual inflation for years, and has only just hit 2.6%, the likelihood of an immediate rate hike seems slim. This situation makes JPY a relatively safe currency to bet against from the standpoint of fundamentals, since the BoJ has little incentive to become aggressive.

Three Potential Pairs to Trade

According to the EdgeFinder, A1 Trading’s market scanner that offers supplemental analysis, the three following JPY pairs are potentially the most promising to buy for Yen bears. Considering that the host countries of all three base currencies are dealing with severe inflation threats, and have become significantly more hawkish in response, these fundamentals contrast well with JPY’s. Here are the pairs, along with their respective EdgeFinder ratings:

1) USD/JPY (Earns a 4, or ‘Buy’ Rating)

3 Ways to Sell JPY

2) CAD/JPY (Earns a 4, or ‘Buy’ Rating)

3 Ways to Sell JPY

3) EUR/JPY (Earns a 3, or ‘Buy’ Rating)

3 Ways to Sell JPY
Get Ready: Big 3 Tomorrow

On September 2nd, tomorrow morning, at 8:30 am Eastern Time, the Bureau of Labor Statistics is scheduled to release another crucial round of US labor market data for last month. The public will learn 1) how average hourly earnings, i.e., labor prices, have changed month-over-month, 2) how many non-farm payrolls (NFP) were added, and 3) what the new national unemployment rate is. These three bits of information will likely cause a great deal of volatility among major pairs.

How Is This Significant?

These metrics offer traders key insight into how hot the US labor market still is, which plays into overall inflation because of its reciprocal relationship with consumer demand. If these numbers beat market forecasts, then the Federal Reserve will be even more incentivized to hike the federal funds rate to slow the economy, which is bullish for USD. However, if the data fail to meet forecasts, this would be bearish for USD accordingly. Current expectations are: 1) average hourly earnings to increase by 0.4%, 2) 295,000 net new hires across non-farm industries, and 3) a static unemployment rate, remaining at 3.5%.

Possible Pairs to Trade

According to the EdgeFinder, A1 Trading’s market scanner that offers supplemental analysis for traders, the following are currently three of the most promising major pairs to trade for USD bulls. Whether you plan on entering a position before tomorrow’s big news, or wait until the data is revealed, these three pairs are worth watching.

1) EUR/USD (Earns a -7, or ‘Strong Sell’ Rating)

Get Ready: Big 3 Tomorrow

2) GBP/USD (Earns a -7, or ‘Strong Sell’ Rating)

Get Ready: Big 3 Tomorrow

3) USD/JPY (Earns a 4, or ‘Buy’ Rating)

Get Ready: Big 3 Tomorrow
3 Great CAD Pairs

Federal Reserve Chair Jerome Powell made a market-moving speech this morning, striking a deliberately hawkish tone regarding the taming of inflation continuing to be the Fed’s priority. While USD is surging against other currencies as markets now expect further interest rate hikes with a greater degree of certainty, let’s explore another currency that may be quite undervalued: the Canadian Dollar. Let’s discuss CAD’s fundamentals, and 3 great CAD pairs to potentially trade next week.

What’s Special About CAD Fundamentals?

Taken at face value, the state of Canada’s economy may not seem especially impressive in terms of fundamental analysis for forex. Annual inflation (7.6%) is high, but not shockingly so relative to other economies, and the unemployment rate hovers just shy of a mediocre 5%. However, upon a closer look, there are many impressive aspects to it, including an extremely hawkish Bank of Canada, a key interest rate identical to that of the US, and positive GDP growth. On top of these conditions, Canada consistently exports oil and gas to the US, an economy approximately ten times bigger, and the estimated value of Canada’s natural resources is over $30 trillion, among the highest in the world.

Best Pairs to Trade

For those who are interested in going long on CAD, here are three of the EdgeFinder’s top-rated suggestions for CAD pairs to sell, along with their respective ratings:

1) GBP/CAD (Earns a -8, or 'Strong Sell')

3 Great CAD Pairs

2) EUR/CAD (Earns a -7, or 'Strong Sell')

3 Great CAD Pairs

3) NZD/CAD (Earns a -3, or 'Sell')

3 Great CAD Pairs
Warning: Jackson Hole is Here

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.

1) GBP/USD

Warning: Jackson Hole is Here

2) EUR/USD

Warning: Jackson Hole is Here

3) AUD/USD

Warning: Jackson Hole is Here
Why Global Recession Is Still Likely

On Friday this past week, the United Kingdom’s Office for National Statistics released the latest reports on the UK’s Gross Domestic Product (GDP), a means of measuring economic output. It was revealed that their economy grew by -0.6% month-over-month, and -0.1% quarter-over-quarter, which entails a contraction for both timeframes. Although these numbers are less disastrous than had been forecast, they are unfortunately part of a trend: New Zealand has also suffered a contraction in GDP, while the United States has experienced two consecutive quarters of contraction, a technical recession. While these declines in output are historically strange, seemingly contradicting recent phenomena like relatively high levels of employment and stock market rallies, they ought to be taken into account by traders nonetheless. Let’s explore some of the root causes of these contractions as well as factors exacerbating them as we discuss why global recession is still likely.

1) Restricted Supply

Often when inflation occurs, it is because demand for a product or service is rising at a faster rate than the supply of the product or service itself. However, this is not always the case; sometimes, inflation is caused primarily by a decrease in the supply of a thing, rather than growing demand alone. We are experiencing this phenomenon today with high food and energy prices, which explains why CPI has far outpaced core CPI (which excludes volatile food and energy prices) in many countries.

Because commodities like oil and commodity crops are scarce resources that consumers rely on to live, geopolitical problems like the invasion of Ukraine and resulting sanctions, as well as environmental problems such as heatwaves, droughts, and famines, restrict available supply. Many of these problems either are or can become chronic and near-ubiquitous, leading to persistent inflation from shortages that cannot be resolved through contractionary monetary policy.

2) Interest Rate Hikes

While interest rate hikes are a crucial monetary policy tool for curbing inflation and cooling an overheating economy, they also come with a nasty side effect: slower growth. This is because rising interest rate are designed to stifle growth by limiting consumers’ and businesses’ ability and desire to borrow money, restricting spending and thus the chances of inflation.

While lower GDP growth, even a contraction, does not necessarily create a recession, it is nonetheless playing with fire by taking steps in that direction. This is especially relevant considering that many central banks, such as the Federal Reserve and the Bank of Canada, have begun fully embracing hawkishness through unusually aggressive rate hikes.

3) Trade Deficits

Another economic factor that often quite literally detracts from a country’s GDP is trade balance. Some wealthy countries have negative trade balances, or trade deficits, created by their imports exceeding their exports. While a trade deficit might grant consumers more access to lower priced goods from other countries, it also results in a net loss of economic output that is subtracted from GDP. When trade deficits are frequent, as in the case of the US, this can theoretically severely impede economic growth, which likely contributed to the country’s technical recession. Both the UK and New Zealand have recently been reporting trade deficits as well, which is unsurprising.

4) Underfunded Pensions

Across the developed world, underfunded pension programs are proving to be a difficult problem to contend with. With large percentages of many countries’ workforces retiring, public pension systems such as Germany’s are struggling to keep up, with the German government bailing out the program with €100bn in 2021. Likewise, Social Security in the US is expected to be trillions of dollars behind in long-term funding, despite the average annual benefit amounting to less than $20,000 per recipient. Failure to improve pensions severely limits demand and growth within an economy, since a large chunk of many countries’ populations are retired adults who still spend.

5) Real Pay Cuts

Some economists worry about the possibility of high inflation combined with hot labor markets creating a ‘wage-price spiral’ where inflation persists uncontrollably due to rising employee earnings. However, the truth appears to be less fanciful, and grimmer. Even with today’s historically high rates of increasing incomes for working people, year-over-year inflation completely negates these raises in most circumstances. For example, with average hourly earnings increasing over 5% in the US, when we account for 8.5% year-over-year CPI, this implies a real pay cut of approximately 3% for working people. This entails a net loss in consumer spending, which means less revenue for businesses, and thus lower GDP growth.

6) Self-Fulfilling Prophecy

For better or for worse, market sentiment has a hand in creating fundamentals (by allocating capital), not just the other way around. Thus, if dread about a global recession continues to loom in the public consciousness, traders and investors may respond by buying and selling accordingly, potentially accelerating a coming recession with stock market and forex selloffs. In this way, the general perception of an impending global recession alone can play a large role in creating one.

Consequences for Pairs?

Lately, much of traders’ fundamental analysis has focused on how central banks respond to inflation as the primary economic threat. However, if global recession becomes a reality, there is a chance we could see central banks return to their dovish ways, which may warrant reassessing pair biases from scratch. It is also worth noting that these hypothetical dovish pivots may not occur in the face of stagflation, which unfortunately seems possible given supply concerns.

Key Takeaways

• A number of countries are currently experiencing negative GDP growth, i.e., contractions in economic output, which traders should take into account while gauging the likelihood of global recession.
• One aspect of each contraction likely involves the potentially dwindling supply of scarce resources such as crops and oil due to war, sanctions, droughts, and other potentially chronic problems. This lowers the amount of ‘stuff’ there is to buy, shrinking output.
• While interest rate hikes curb inflation within a currency’s host country, they also disincentivize consumers and businesses from borrowing money, restricting GDP growth.
• Economies prone to trade deficits, i.e., spending more on imports than they receive selling exports, impair their GDP growth by net losing output in the trade process.
• Underfunded pension systems, which cause lower benefits for elderly consumers, are proving to be an international problem, limiting consumer demand and GDP accordingly.
• Although wage growth is rising at the fastest rate in years, it still often pales in comparison to high rates of inflation, limiting consumer demand and GDP accordingly.
• Fear of impending recession can become a self-fulfilling prophecy by spooking investors and speculators, encouraging mass selloffs that create the catastrophes they were afraid of in the first place.
• If a massive event such as global recession, or even stagflation, becomes reality, this could warrant a complete reevaluation of pair biases and fundamentals.

Next Tuesday, the RBNZ will announce their new official bank rate which is expected to be 3%, a 0.50% rise from July. This hike will make it the highest yielding major currency on the market. Here is why you should consider buying the kiwi before Tuesday's decision as well as some strong NZD long setups.

Preview of Policy Decisions

The Regional Bank of New Zealand has been very adamant about tackling inflammatory issues in their economy. So much so, that analysts have stated that rates will not only reach a certain level but stay there for an extended period of time.

It also appears that New Zealand's central bank is planning to stay the course with consistent 50 basis point runs in the future. GDP is still in decline, so the economy is experiencing contraction, but that does not seem to deter the RBNZ for now.

People do have more confidence in the bank's battle as surveys saw a decrease in inflation expectations from 3.29% to 3.07% in 2023.

Kiwi Outlook

Subduing inflation is a primary factor in the kiwi's strength. Commodity prices like gold, oil and agriculture have declined overall due to supply chain issues and geopolitical conflict. This has an affect on the economy, but it is secondary towards CPI.

Investors are now pricing in the kiwi's target as we come to an end of this trading week. Outlook is strong on this currency right now.

Kiwi Setups

NZD/CHF

kiwi

Kiwi-swiss jumped today on rate hike anticipation. Price formed a higher high on the 1D, but still needs to close above resistance to validate a breakout. Price has been on a relatively long downtrend since February of 2021. Because of this strong trend to the downside, it's hard to tell when sentiment will shift. But a break above resistance could take price higher towards 0.61700s.

NZD/CAD

kiwi

NZDCAD is coming up to test a previous top after breaking above a falling trend line on the 1D timeframe. More resistance lies above around the 61.8% fib retracement level and another longer term falling trend line.

EUR/NZD

kiwi

One of the hardest moves on the kiwi is EURNZD after price drops 0.79% already today. Price already broke under support and formed a lower low, but it still looks like there is room to run on the 1D timeframe. Strong downside momentum could take price all the way to test the lows around 1.56904.

New BRICS Currency Vs USD

What Is BRICS?

The acronym BRICS refers to an economic alliance between multiple powerful emerging economies, including Brazil, Russia, India, China, and South Africa, respectively. Altogether, they currently generate over 25% of the world’s GDP, and are home to over 40% of the global population. While BRICS membership does not necessarily entail exclusive trade perks or benefits, they value geopolitical cooperation with one another, meeting at annual summits since 2009.

How Are They Challenging USD?

Many analysts interpret BRICS as being a response to the West’s expanding geopolitical influence via NATO and the G7, one that grows ever more significant following the invasion of Ukraine. This function is particularly evident given that Russian President Vladimir Putin recently proposed in June that BRICS develop an "international reserve currency based on the basket of currencies of our countries" to rival the US Dollar. If enacted, this could mean the end of an era for USD hegemony on the world stage.

How Serious Are Their Intentions?

China is reportedly aiding in this new reserve currency endeavor, as Western sanctions against Russia pile up while other BRICS countries fear similar treatment. China’s President Xi Jinping has accused the US and its allies of constructing “a small yard with high fences” via economic warfare. This international sentiment is apparently not unique: thus far, five more countries have either applied or plan on applying to join BRICS, including Iran, Argentina, Saudi Arabia, Turkey, and Egypt, with many more countries formally invited. This interest is especially significant in light of the existing tensions between these countries, such as China and India, Iran and Saudi Arabia, etc.

How Could This Affect Major Pairs?

If such an alternative reserve currency is enacted, and subsequently denominates many international trade transactions as the BRICS alliance grows, the foreign exchange market could see a big drop in demand for USD against other currencies. This could also herald the end of the petrodollar since many BRICS countries are prominent oil and gas exporters. Although these ambitious plans will likely not be realized for some time, this could eventually mean a huge paradigm shift for major pair fundamentals.

Yen pairs are much more volatile at the end of the week. JPY is showing strength after the recent Fed move to raise rates to 2.50%. The yen index is up 1.45% at the time of writing this, but heavier moves are expected to come.

Why Yen Is Stronger

Demand for the currency stems from the performance of gold. As gold's price rises, so does the yen. According to Orbex, USD/JPY and gold are -94% correlated, meaning that JPY rises while USD falls during a rise in gold's price.

yen
US Advance GDP q/q

Gold's recent gains could also be a result of the latest GDP numbers this month. Recessions and geopolitical conflicts tend to favor the price of gold more and both of those events are happening now. Thus, a continual contraction in US output will likely give the yen a boost due to the positive correlation it has with gold and the negative correlation with USD.

Will Yen Keep Climbing?

The yen is historically a risk-off pair, so the uptrend is likely to continue. However, it's harder to tell which risk-off currency is better to choose from. So, it will probably look stronger to investors when stacked against minor currencies or risk-on ones.

Up against the USD, however, JPY does not look promising. We're looking at GBPJPY, EURJPY and CADJPY on the short side while CHFJPY and USDJPY are more questionable.

Yen Setups

GBP/JPY

yen

This pair looks bearish as a potential momentum shift may have occurred on the 1D timeframe. Price is making lower highs and had a fake breakout from a wedge pattern. The pair may test the bottom of the rising trend line in the wedge. If that happens, we should watch for a break underneath and a fall to the 160.500s.

EUR/JPY

yen

EURJPY has already broke underneath a rising trend line on the 1D timeframe. It also established a lower low which suggests that price wants to continue lower. If the pair closes below that trend line and 136.900s we might see another leg down to the 132.800s.

CAD/JPY

yen

Similarly to the USD, CAD is looking mostly stronger than the yen. However, price did cross under a falling trend line and is continuing to fall lower. Price maty fall to the 101.900s level before finding support. A double top lies around 107.

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