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)
Statistics Canada released a surprising new batch of inflation data this morning: month-over-month CPI failed to meet market forecasts, declining by 0.3% instead of the anticipated 0.1%. Rather than being an outlier, the other measurements of CPI mostly followed suit, as both year-over-year Trimmed CPI and Median CPI likewise failed to meet expectations. Trimmed CPI’s poor performance, clocking in at a 5.2% increase year-over-year instead of the expected 5.5%, could be interpreted as particularly significant in that it excludes the 40% most volatile prices. This may theoretically set CAD fundamentals apart from USD, in that the Federal Reserve has incentive to keep hiking interest rates due to stubborn core inflation, while the Bank of Canada no longer does. Regardless of your overall Canadian Dollar bias, this is shocking CAD inflation news.
Best Pairs to Trade
While there are multiple ways to take this news, I personally have two takeaways: 1) USD/CAD bullishness now seems more compelling in light of the growing disparity between Canada’s inflation problem and the US’ inflation problem, and 2) the market reaction to this news could present discounted opportunities to buy CAD against less promising currencies. These readings are consistent with current EdgeFinder signals as well, as can be seen with the following pairs:
1) USD/CAD (Receives a 3, or ‘Buy’ Signal)
Price action has just hit a historic resistance zone, with Keltner Channels also indicating overbought conditions. Conservative traders may want to wait for a more optimal buying opportunity, though there may be some breathing room left before hitting the upper trendline and top of this resistance zone.
2) GBP/CAD (Receives a -6, or ‘Strong Sell’ Signal)
Price action is currently retesting the depicted zone as resistance and could potentially serve as an optimal selling point.
3) NZD/CAD (Receives a -4, or ‘Sell’ Signal)
Despite the bearish CAD news and support at 0.79, price action has still been bearish for this pair today. There is also ample room to potentially continue selling off before touching support from the lower trendline.
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.
As the trading week comes to a close, and forex traders are given another weekend of respite to mentally rest and/or backtest, it is worth considering where to pick back up on Monday. While there are many criteria to consider when selecting pairs to watch closely, in this article we will list several such pairs based on scheduled economic data releases and compelling EdgeFinder analysis. Based on these two categories, here are 4 pairs to watch next week.
1) GBP/CAD (Receives a -7, or ‘Strong Sell’ Signal)
On Tuesday, September 20th, Statistics Canada will be releasing a variety of month-over-month and year over year CPI data for August. On Thursday, September 22nd, the Bank of England (BoE) is forecast to hike the Official Bank Rate by 50 basis points, issuing a corresponding monetary policy summary as well. The Bank of Canada has been far more hawkish as of late than the BoE, so unless there are any bullish surprises, this pair seems likely to continue its bearish trend.
2) GBP/CHF (Receives a -7, or ‘Strong Sell’ Signal)
Along with the aforementioned BoE upcoming monetary policy decision, the Swiss National Bank (SNB) will also be deciding on a new policy rate on Thursday, September 22nd. The SNB is expected to implement a rate hike of 75 basis points, doing away with the precedent of negative interest rates. These expectations have seen this pair fall to historically significant lows, as can be glimpsed on the 1-week timeframe above.
3) GBP/USD (Receives a -6, or ‘Strong Sell’ Signal)
This pair presents another opportunity to sell GBP, since the Federal Reserve will be adjusting the Federal Funds Rate on Wednesday September 21st, as well as issuing accompanying economic projections and a related statement. Fed Chair Jerome Powell currently shows no signs of relenting from hawkishness as a 75 basis point rate hike is forecast. With support being tested, we will see whether the BoE or the Fed could present a catalyst for a breakout to the downside.
4) USD/JPY (Receives a 4, or ‘Buy’ Signal)
Along with the upcoming Federal Reserve decision, the Bank of Japan (BoJ) will also make a monetary policy decision this week. If the BoJ continues to keep their Policy Rate below-zero, further abstaining from rate hikes as currently forecast, this could usher in even more bullish momentum for this pair. Depending on how the Fed’s move meets or contrasts with market expectations, USD/JPY could yet again touch, or break out above, trendline resistance.
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)
2) GBP/USD (Receives a -5, or ‘Sell’ Signal)
3) USD/JPY (Receives a 4, or ‘Buy’ Signal)
(More) Bad News for the United Kingdom
This morning, at 2 am Eastern Time, the UK’s Office for National Statistics reported that month-over-month Gross Domestic Product (GDP), a key measure of economic output, had failed to meet forecasts. While markets and analysts had expected 0.3% or 0.4% growth, the reality was a disappointing 0.2%. Though not a contraction, it is yet another in a long list of unfortunate national events ranging from double-digit annual inflation to the death of Queen Elizabeth II.
With newly elected Prime Minister Liz Truss taking the reigns at a time of great economic suffering, and a still-wary Bank of England unable to halt supply-side woes, there is little certainty to be found for the Pound Sterling. With fundamentals, institutional sentiment, and technical analysis pointing towards continued GBP bearish momentum, let’s explore which GBP pairs have the best selling potential.
Top Three Pairs to Sell
According to the EdgeFinder, A1 Trading’s market scanner software, the three most promising pairs to sell are all GBP pairs. All three are experiencing months-long downtrends, with recent bullish price action retesting key levels in the form of resistance. Here they are, along with their respective EdgeFinder signals:
1) GBP/USD (Earns a Score of -7, or ‘Strong Sell’)
2) GBP/CHF (Earns a Score of -7, or ‘Strong Sell’)
3) GBP/CAD (Earns a Score of -7, or ‘Strong Sell’)
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 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)
2) CAD/JPY (Earns a 4, or ‘Buy’ Rating)
3) EUR/JPY (Earns a 3, or ‘Buy’ Rating)
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)
2) GBP/USD (Earns a -7, or ‘Strong Sell’ Rating)
3) USD/JPY (Earns a 4, or ‘Buy’ Rating)
The past two years have been historic for gold against the US Dollar (XAU/USD), as XAU/USD crossed above the 2000 level for the first time in history in 2020, and then again in early 2022. However, shortly after touching resistance in March this year, the pair began trending downward, recently hitting key support at 1700. With year-over-year inflation still roaring at 8.5% as the US experiences a technical recession (two consecutive quarters of negative GDP growth), it may seem strange that gold, renowned as a perennial safe haven asset, has not been performing well. Now is the perfect time for us to discuss, and ask: is gold's value a myth?
Gold has a revered status among many traders and investors, with some economists and financial gurus even believing gold’s fundamentals guarantee its value as a sort of ultimate security. Some of this is rooted in nostalgia for the gold standard, and the belief that USD only had real value when it was backed by gold. This belief is an instance of a monetary theory called metallism.
However, even those who don’t subscribe to metallism still have reason to be concerned about the risk inherent to today’s fiat currencies, which are backed by governments rather than commodities. Worries about fiat money are often central for gold bulls, as they consider gold to be a perfect alternative to the waning purchasing power of cash. For the sake of evaluating these biases, let’s consider compelling arguments for both gold bullishness and bearishness.
The Bullish Case for Gold
Although there are many reasons to be bullish on gold, there appear to be three primary ones. First, gold is a scarce resource; there is a finite amount of gold in the earth, and unlike certain commodities like lumber and grain, the total amount of gold in existence cannot (practically) be manually increased. This inherently limited supply reinforces gold’s millennia-long precious metal status.
Second, demand for gold has persisted since the earliest recordings of human civilization, only increasing exponentially as the earth’s population grows. While much of consumer spending on gold is still grounded in demand for jewelry and other luxury items, gold is also used across many industries to create computer chips, dental crowns, and more. Much of this demand also comes from gold investors, of which there are many, including the Federal Reserve.
Third, gold is a store of value, retaining purchasing power while a fiat currency’s purchasing power gradually (or rapidly) declines over time. This is because, as governments and central banks coordinate economic growth and expansion, increasing a given country’s money supply accordingly, inflation occurs as consumer demand outpaces the supply of goods and services. Gold is exempt from this process since it cannot be printed ad infinitum, and its purchasing power is bolstered with time as investors seek a hedge against inflation.
The Bearish Case for Gold
There are also many reasons to be skeptical of gold as an investment, including these three. First, while gold is indeed scarce, this does not mean the supply of gold is static, as mining production increases over time. According to Statista, global gold production has even surpassed 3000 metric tons per year several times this past decade, which means increasing availability for consumers.
Second, though there is indeed consistent demand for gold, over 33% of this demand comes from investors, including central banks. While gold is certainly a store of value to some degree, the fact that approximately one-third of spending on gold comes from investors seems troubling, as some of this could be reducible to speculation. This is especially worth considering since central banks are effectively subsidizing the gold markets with additional demand, which may not last.
Third, although fiat currencies and the foreign exchange market lend permanent precariousness to the value of money, XAU/USD’s performance has also been volatile and erratic. While XAU/USD is up 5000% since 1971, it has been a rocky road getting there, with many consecutive years of stagnation and decline as well as jumps. Considering the effect of monetary policy on XAU/USD, as well as dips following historic highs, there is reason to believe gold’s value will continue dropping amid the Fed’s aggressive rate hikes.
Conclusion: Truth, or Fiction?
The bad news is the world has seldom encountered a financial situation like the one we are currently in. Conventional Keynesian wisdom prescribes that governments and central banks spend their way out of recessions, and tax and tighten amid high inflation; however, this doesn’t take supply-side issues into account, or consider these two phenomena occurring simultaneously. Thus, we are in uncharted waters, and it is unclear what effect this will have on XAU/USD.
The good news is we still have recent historical data to work with, and new circumstances don’t render it altogether worthless. On top of this, these bullish and bearish arguments for gold are not mutually exclusive, as both can be helpful regardless of bias. While short-term bearish momentum seems to be more likely amid contractionary monetary policy over the next few years, this doesn’t negate existing demand for gold, and presents myriad buying opportunities for long-term bulls who may look forward to the eventual return of expansionary monetary policy. A1 Trading's EdgeFinder tool is also a helpful way to keeps tabs on XAU/USD sentiment and fundamentals going forward.
• After soaring in value over the course of the pandemic, XAU/USD experienced a sharp bearish reversal in 2022. With such mixed results in a time of high inflation and technical recession, it is worth wondering whether gold’s mythical safe haven status is outdated.
• Gold has a prominent reputation among traders and investors as being perhaps the most promising of all financial assets, destined to appreciate amid the inevitable uncertainty brought by fiat currencies. There are compelling arguments both for, and against, this.
• Three reasons to subscribe to XAU/USD bullishness are 1) gold’s scarcity, 2) persisting demand for gold, and 3) the depreciating value of fiat currencies, including USD.
• Three reasons to subscribe to XAU/USD bearishness are 1) gold’s increased availability, 2) subsidized demand for gold, and 3) XAU/USD’s erratic historical performance.
• Unfortunately, given the experimental nature of today’s monetary systems, it is impossible to know what gold’s value will eventually be. However, when money supplies continue expanding, there is reason to believe gold’s value will grow in correlation.
• As the Federal Reserve pursues monetary policy hawkishness in the face of 8.5% year-over-year US inflation, the XAU/USD downtrend seems likely to continue due to USD strength. Once the end of Fed tightening is near, buying opportunities may abound.