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.
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.
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.
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.
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.
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.
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.
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.
We may be entering another volatile week of trading as testimonies from spokesmen of US and Australian central banks are set to happen. Fears of a global recession have investors moving into risk-off currencies and indices around the world fall into bear market territory. In light of the current market condition, here are some of the best trade setups we see going into this week (6/20/2022).
USDCAD is one of the best trending pairs to trade right now as price has moved mostly sideways with a gradual slant upward. As oil prices take a break from its recent surge, the Fed pushed interest rates higher by 75 bp causing growing demand for the dollar. Price has touched a previous high and retraced from the 1.30700s on the 1D timeframe, establishing a double top. However, there is clean support right below in the 1.29680s where price can retest and potentially head back up into the 1.3s again.
Aussie pairs are catching the most volatility today with the RBA governor testimony in focus. Aussie-Swiss fell towards its March highs, but the pair bounced before it could hit a support level around 0.66800s. This support is also coupled with 61.8% fib level on the 1D timeframe which could serve as strong support for the pair should price move lower.
AUDJPY is up 0.55% today on yen weakness. Price came down to test the 50 DMA before rejecting the lows and shooting back up. Higher lows and highs have been established which suggests the uptrend will probably continue. With that in mind, the pair could go back up to test the highs around 96.900s on the 1D timeframe. Additional support lies below around 86.087.
CHFJPY is one of the strongest 'buy' ratings on the Edgefinder today at +4. The Swiss Franc is stronger this week for last week's recent rate hike decision from -0.75% to -0.25% interest. BOJ plans to keep the same monetary policy even though other countries are working to tighten over the next several months. Price jumped again today and is above previous resistance in the 137.800s. There is also a supportive trend line that the pair could bounce off from should price move lower.
GBP/USD is now a -8 strong sell rating on the Edgefinder after unemployment and inflation exceed that of the US. All metrics are red except for GDP growth while the majority of retail is long this pair. Institutional interest is strong on the USD as the number of long contracts increased by 10% last week while GBP long contracts fell by 4%. Fears of an economic recession in both the US and UK point towards heavy risk-off sentiment which gives the dollar a considerable advantage in this situation. The pair just retraced from the recent gains it made in the last week suggesting that price could come down to test the lows again around 1.19392.
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.
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.
Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:
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.
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 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.
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.
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.
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.
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.
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.
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.
This morning saw demand for USD rapidly pick up steam as US inflation data came in hotter than expected. Month-over-month CPI had been forecast to rise by 0.7% in May; at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed that it had increased by 1%, or 8.6% year-over-year, a forty-year high. Likewise, Core CPI (which excludes food and energy prices) was forecast to rise by 0.5% month-over-month, instead hitting 0.6%. On this news, the DXY is up 0.8% and has risen over the 104 level intraday, as EURUSD is down 1% and the S&P 500 is down nearly 3%. With this context in mind, let’s discuss 3 ways to capitalize on inflation now.
Trade Major Pairs
This CPI news is a huge fundamental catalyst for USD pairs since it verifies that the US economy is indeed still overheating, validating further interest rate hikes by the Federal Reserve. This is very bullish for USD, which makes buying the USD against other currencies even more appealing. If traders are searching for optimal USD pairs to take positions in, a good place to start is by locating pairs where analysis leans in USD’s favor to the greatest degree possible.
Some such options include a) shorting GBPUSD and EURUSD, which receive -7 (‘strong sell’) and -5 (‘sell’) signals, respectively, from the EdgeFinder, and b) going long on USDJPY, which receives a 4 (‘buy’) EdgeFinder signal. Because USD experienced so much buying pressure this morning, conservative traders may want to find an opportune point of entry by conducting technical analysis, e.g., waiting for a pullback and retest of key support/resistance.
Though admittedly a controversial opinion, I am waiting for an optimal point of entry to purchase gold against USD. XAUUSD experienced quite the selloff this morning before a startling recovery, jumping from a low of 1825 to hovering around 1855 at the time of writing this. This jump was seemingly prompted by finding support around the 1830 level, a clear zone of support on a 1-hour timeframe.
I interpret fundamentals being bullish for XAUUSD due to demand for the precious metal in several different industries and its historical status as a safe haven investment in times of economic crisis. There have been periods where gold’s rise in value does not correlate with USD depreciating in value, which is helpful to consider in cases like these. According to the latest COT data, institutional traders are similarly long on both USD (76%) and gold (73.56%). I am planning to purchase XAUUSD if price action retests the trendline depicted on the 1-day timeframe above, though this opportunity may not come if demand continues to grow quickly.
Invest in the Stock Market
Though it may seem strange in the face of persisting hyperinflation and potential for recession, economic downturns and stock selloffs do present myriad buying opportunities for long-term investors. If you are not planning on retiring for decades, you can utilize dips in the stock market and indices to build wealth over time, assuming you are willing to sacrifice immediate results. For example, when the Dow plummets over 600 points like it has today, investors can seize these events as opportunities for cheap purchases that will yield returns years down the road.
If your investment portfolio keeps crashing in the meantime, this does not have to be discouraging since they are merely unrealized losses; they will likely grow in value through the decades if you are invested in index ETFs and other trustworthy funds. Any further selloffs present even more opportunities for regular, small purchases. (However, investing in individual stocks is a completely different story, and I personally believe that even the most skilled retail investors are not sufficiently equipped to handle the inherent risks involved.)
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.
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.
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.
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.
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.
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.
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.
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.
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 explore a selection of important economic news today, which can be helpful for identifying fundamental catalysts, prepare for future volatility, and devise trade setups.
Japan: Economy Watchers Sentiment
Released by Japan’s Cabinet Office at 1 a.m. Eastern Time, this indicator gauges economic sentiment in terms of consumer spending by surveying a few thousand service workers in Japan’s economy. Anything over a score of 50 indicates economic optimism; the forecast had been 51.9, but the actual report was 54. This would usually indicate strength for JPY, as it could help push the Bank of Japan towards tightening monetary policy. However, considering their willingness to continue extreme dovishness, I interpret this as a bearish signal for JPY, since the BOJ may feel further emboldened by economic optimism to extend low interest rates.
Euro Area: Final Employment Change & Revised GDP (both q/q)
Released at 5 a.m. Eastern Time, both metrics of economic health were better than previously expected: employment was forecast to increase by 0.5% and ended up increasing by 0.6%, while GDP growth also clocked in at 0.6%, double the percentage expected. These especially contribute to a bullish case for the EUR, since the Euro Area is clearly dealing with an overheated economy, and the European Central Bank seems primed to potentially act and pivot into gradual hawkishness. We will be hearing from the ECB tomorrow.
United States: Final Wholesale Inventories (m/m) & Crude Oil Inventories
Released at 10 and 10:30 a.m. Eastern Time, respectively, these two indicators may showcase some signs of a slowing US economy. According to the Census Bureau, there was a 2.2% increase in the value of goods in stock for wholesalers, where only 2.1% was expected. This reveals supply of such goods outpacing demand in an unexpected fashion. Likewise, according to the Energy Information Administration, the number of barrels of crude oil held in inventory by commercial firms increased by 2 million, whereas a change of -2.6 million had been expected. With crude oil already at staggering price levels, this indication of slowing demand has further implications throughout the US economy, perhaps as a proxy for consumer spending elsewhere. This is bearish news for USD.
China: USD-Denominated Trade Balance
Tentatively due today, the CGAC will be releasing data on China’s trade balance, which is frequently a surplus to some degree. While China is forecast to have net exported $58 billion, it could exceed expectations like prior months, despite China’s recent zero-COVID policy measures which limited economic activity. Not only do these growing margins signal CNY strength and continued economic growth for China, they also ostensibly indicate lower growth expectations for trade partners and economic competitors, such as the US, due to corresponding trade deficits. This information will come on the heels of lowered global economic growth forecasts from the World Bank and the OECD.
USD is stronger today as economists expect hotter inflation than last month's report. The dollar index is up 15 cents at the time of writing this. Here is what we think will happen before CPI news this Friday, followed by a couple USD pair setups.
With what we have now, it looks like the dollar will remain strong. Last week, the US reported better-than-expected NFP numbers which more than likely supports the Fed's already-aggressive stance of keeping higher interest rates. To fuel this policy even more, inflation is still a major concern in the US, and Friday's CPI data is expected to more than double last month's rise. Investors are expecting the Fed will stay the course due to these issues.
A considerable number of open contracts were bought last week according to COT, but the number of long and short positions nearly matched each other. Still, the overall amount of long positions quadruples the total shorts on these contracts, so institutions are clearly long.
The pair just crossed over the 50% level with some bullish upside while testing a double top in the 0.964s. The pair has some room to run if it can break above the current resistance level on the 4H timeframe. The 0.976s looks like a realistic level to test before things may turn the other way.
EU caught some resistance on the 1D after price rose to a falling trend line and a previous bottom. The lower highs and bearish pressure on the most recent candle suggests more weakness in the euro than originally anticipated. Price may try to come down to the 1.03s to test another bottom for support.
UJ flies above significant resistance on the 1D timeframe after breaking out of a flag pattern several days ago. A close above this level looks promising for the pair and would be increasingly bullish for those long USD. The 131s could also be serving as a new support zone should price retrace.
USDJPY saw a return to strong bullish price action this week as the pair jumped over 300 pips higher intraweek from Monday’s opening price of 127.13. This momentum has occurred despite recently released, better-than-expected economic data for Japan, including low unemployment numbers and higher retail sales figures year-over-year. At the time of writing this, USDJPY sits at 129.79 as buying pressure stalls today. Let’s take a closer look as we explore why USDJPY is still worth buying.
Japan’s economy is in a relatively unique situation compared to the US. At first glance, there appear to be many bearish fundamental indications for USDJPY: Japan’s unemployment rate is an impressive 2.5% (compared to 3.6% in the US), inflation has been climbing consecutively month-over-month, and the quarter-on-quarter GDP contraction in Japan was 0.2%, far less worrisome than the 1.5% contraction in the US.
However, this information is all secondary in light of the Federal Reserve’s hawkishness, as they pursue tight monetary policy through steadily raising benchmark interest rates to cool the overheated US economy, where year-over-year inflation is currently 8.3%. The Bank of Japan, on the other hand, is continuing their ultraloose monetary policy strategy; they are keeping their key short-term interest rate negative, as year-over-year inflation clocks in at a tolerable 2.5%.
In light of this contrast between urgent hawkishness and comfortable dovishness, with both tailored to their countries’ respective inflation threats, the biggest signs point to continued bullish momentum for USDJPY. If traders are waiting for a fundamental catalyst to determine an optimal point of entry, the Bureau of Labor Statistics is revealing further significant employment and hourly earnings data for the US tomorrow, June 3rd. I am personally waiting for this news before entering a long position.
Despite a three-week downtrend, when looking at USDJPY at a 1-week timeframe, there appears to currently be little for bulls to be concerned about. After bullish momentum caused a massive breakout to the upside of the historic 126 resistance zone, not visited since 2015, price action has retested the zone as support, nearly in conjunction with 9 EMA. This retest has since been followed by a renewed surge in buying pressure, which has seemingly paused only in the face of today’s disappointing ADP Non-Farm Employment Change numbers in the US. As these support levels continue to hold, a continuation of the years-long bullish trend seems probable.
While sentiment analysis can sometimes be tricky to conduct due to ambiguity in COT data and uncertain economic climates, there is little nuance to be found in this case. The stars have aligned as the most recent COT reports show over 77% of institutional traders going long on USD, while only 12.5% are going long on JPY (though this is an increase of nearly 3%). This pairs well with retail sentiment, with only 23% of retail traders currently long on USDJPY, a bullish indication. This data is courtesy of A1 Trading’s EdgeFinder, a helpful tool for any trader aiming to improve their analysis.