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)
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)
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)
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.
Consideration #1: A Hawkish Bank of England
The morning of Thursday, August 4, the Bank of England (BoE), the United Kingdom’s central bank, enacted a substantial interest rate hike: 50 basis points (bp), bringing the base rate up to 1.75%. The size of this hike is the BoE's largest since 1995, which had last occurred before it had even gained its current institutional independence from the British government. This hawkish development is timely, considering annual inflation in the UK is currently at 9.4%, the highest rate since 1982.
Consideration #2: Context is Key
However, this increased comfort with contractionary monetary policy from the BoE can also reasonably be interpreted as too little, too late. With the highest rate of inflation in the G7, it would be fitting for the BoE to likewise lead by example when it comes to tightening measures. Rather, their first 50 bp rate hike follows the Federal Reserve’s 75 bp hikes, and the Bank of Canada’s full 100 bp rate hike, not even exceeding market forecasts. This hike seems more akin to treading water than rising to the occasion, reminding us that historic doesn’t necessarily mean adequate.
My GBP Bias: Bearish
Despite the BoE’s historically hawkish move, this does not appear to signal a meaningful newfound commitment to subduing high inflation. Thus, I personally do not interpret the narrative surrounding GBP fundamentals to have changed, at least in any significant sense. Considering the lukewarm rate hikes, persistence of high inflation, and the plausibility of eventual stagflation in the UK, I will be looking for opportunities to short GBP against stronger currencies.
Best Pairs to Trade
According to the EdgeFinder, an A1 Trading tool for supplemental analysis, here are two of the most potentially promising pairs to trade for GBP bears: 1) GBP/USD, which earns a -4 ‘sell’ signal, and 2) GBP/JPY, which earns a -3 ‘sell’ signal.
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.