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What IPEF Could Mean for US Markets

On Monday, May 23rd, US President Joe Biden unveiled a new trade pact with twelve Indo-Pacific countries called the Indo-Pacific Economic Framework (IPEF). The launching of this deal, coupled with Monday’s news that the Biden administration is considering the merits of rolling back tariffs on imports from China, saw the Dow close nearly 500 points higher on Monday while the DXY fell from 103.04 to 102.04. These significant movements have thus far extended through this week into a 1200+ point rally for the Dow and a drop in DXY below 102, fueled by further news such as a seemingly palatable FOMC agenda and optimistic economic growth predictions from the Congressional Budget Office. With this context in mind, let’s consider what IPEF could mean for US markets.  

What We Know

The following countries are the initial partners: Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, Vietnam, and the US. Fiji will now be joining as well. The aggregate economic output of these countries is the equivalent of approximately 40% of the world’s GDP.

Significantly, this deal is not an actual free trade agreement, and thus there will be no traditional trade incentives between the US and its partners, as this would require action from Congress. Rather, the pact is ostensibly built on four ‘pillars’, which are, in no particular order: a) improving supply chains, b) encouraging infrastructure and green energy investment, c) promoting trade, and d) reformulating taxation and anticorruption measures.

What We Don’t Know

As many journalists have pointed out, we have few concrete details to work with just yet. While the broad brush strokes of the deal are sweeping, and could feasibly have all sorts of economic and geopolitical implications, negotiations have yet to deliver any concrete particulars, and thus traders and investors are currently in the dark when it comes to the minutiae and fine print.

While it is not fundamentally a free trade agreement or a trade bloc, it is not yet clear to what extent it could end up resembling one, or to what degree it could mirror the eventually ill-fated US involvement in the Trans-Pacific Partnership. It is also unclear how, if at all, the new agreement will compete with the Regional Comprehensive Economic Partnership (RCEP), a set of free trade agreements that have formed the largest trade bloc in the world, which includes most of the countries involved in the IPEF, as well as China and others.

Possible Market Outcomes

While it is too early to know what long-term effects the currently amorphous IPEF will have on US markets, it’s launching appears to have been a bullish fundamental catalyst for the stock market this week, and a bearish catalyst for the DXY. Rather than making any judgments about its consequences in these early stages, the wiser move would be for traders to keep their eye on the pact as it evolves over time, as it may be ripe with future fundamental catalysts.

However, it seems probable that the long-term outcome of IPEF will fall between two general possibilities: either 1) the deal could pan out to be relatively fruitless and toothless, and have little to no real impact on trade, foreign investment, and GDP growth expectations in the US. In that case, there would be little new to report on in terms of fundamentals and corresponding market volatility. Or, 2) the deal could gain traction and yield results somewhat comparable to a free trade agreement. Historically, this can entail increased GDP growth expectations, increased job outsourcing, increased trade deficits, and other conditions in the US that are relatively bullish for the stock market and bearish for the DXY, government bonds, and other safe haven assets. To what extent either of these transpire, we will have to wait and see.

Key Takeaways

  • The IPEF is a newly formed soft trade pact between the US and thirteen other countries, the economic output of which account for approximately 40% of the world's GDP.
  • It is not a free trade agreement, and the details of the framework have yet to be negotiated. However, it appears it may already have market-moving potential.
  • While traders can monitor the IPEF and its market implications as details gradually emerge, I anticipate it either having a long-term neutral effect on US markets or becoming a bullish catalyst for stocks and bearish for DXY and government bonds.
How to Trade EURUSD Now

EURUSD saw a breakout to the upside of a four month long bearish trendline on Monday, as bullish momentum caused it to close over 120 pips higher on big monetary policy news from the European Central Bank (ECB). Christine Lagarde, the ECB’s President, announced they will be pivoting away from net asset purchases, and subsequently negative interest rates, in the next several months. At the time of writing this, the EURUSD sits at 1.072 as buying pressure continues. With that in mind, let’s dive deeper as we explore how to trade EURUSD now.

Fundamental Analysis

As mentioned previously, EURUSD bulls have a lot to be excited about. Lagarde described the next steps in the eurozone’s monetary policy agenda as being something of a “turning point”, which is especially significant when traders consider that negative interest rates were an ECB precedent prior to Covid-era ultraloose monetary policy. This new direction, interpreted in conjunction with rising inflation in the eurozone, along with a solid 0.4% Q1 increase in seasonally adjusted GDP for the EU, are particularly validating for eager buyers.

However, when looking at the greater economic context, things may not be quite what they seem; peripheral, yet significant, data paint a bleaker picture for the EU than what the bullish momentum currently reflects. Unemployment in the eurozone is nearly double that in the US, the ECB lags far behind the Federal Reserve in terms of rate hike aggression, and the EU has gradually phased out frequent trade surpluses for deficits. On top of this, Europe is still in the throes of contending with the war in Ukraine and corresponding sanctions, with an EU embargo on Russian oil expected in the next few days. Thus, I estimate that the recent buying pressure for the EURUSD will be short lived, or perhaps only premature.

Technical Analysis

The recent breakout to the upside of bearish trendline(s) is impressive, with the historic 1.04 support level having prompted a powerful reversal for the EURUSD. However, I am anticipating a retest of the significant 1.07-1.08 resistance zone, and a return to bearish momentum. I imagine this retest will correlate with the DXY seeing a retest of its 1.02 support level, once a significant resistance level in March 2020. Thus, I entered a short position in the EURUSD at 1.07, and I am hoping to take profit at 1.04.

Sentiment Analysis

According to A1 Trading’s EdgeFinder tool, 31% of retail traders are currently long on EURUSD, while 69% are short, a bullish indication. This pairs well with the current COT data, which reveals about 75.5% of institutional traders going long on the USD, a decline of over 1%, while over 52% are long on the EUR, up nearly 0.5%. It is also important to note that this data, released on Friday, has not captured the bullish sentiment we have seen so far this week. However, I am still anticipating a return to form for institutional traders, wherein their orders will once again align with the general economic pessimism in the eurozone.

Key Takeaways

  • EU fundamentals may not be as good for EURUSD bulls as recent monetary policy news and price action suggest.
  • Though a significant bullish breakout just occurred, a key resistance zone now stands in the way.
  • I am going short on EURUSD, with the hopes of taking profit at 1.04.
  • Sentiment currently leans in favor of EURUSD bulls, though I imagine this will change.

Traders see some green today as the S&P climbs a little over 1% today. After several weeks of red, investors may see a minor turnaround for the time being. However, SPX500 bulls should still be wary of a few things that warn of a recession.

Potential Bottoming

There are signs that the index could be bottoming and ready to shift momentum to the upside, however, the past few times have failed to do so. But, with every failed attempt, we have seen a significant bounce that encourages traders to scale back in. The problem is that volatile swings in either direction that ultimately end up in lower lows keeps investors from having enough confidence in the market.

Bond yields have come back up again to around 2.86% which points towards strength in the USD. Treasuries have retained a 2.8% yield for the past month or so. The dollar index has been pulling back regardless, so it could be indicating that either the USD has been priced in or that we are gearing for another long setup on the dollar.

COT suggests that the dollar is still long-heavy while both long and short contracts increase from last Tuesday. At the same time, institutional holdings on the SPX500 have decreased while short contracts saw an increase. The number of long vs short contracts is continuing to even out which is alarming to investors.

SPX500 Setups

spx500

A look on the 4H timeframe helps us see that a bottom could be coming soon based off a few technical indicators. Lower lows have been made but at a decreasing rate. Instead of a stair-like pattern we used to see, the lower lows are forming a kind of slope pattern. This could be indicating that a push higher is likely. The question lies in how much higher will it go before retracing once again.

spx500

The 1D timeframe also provides some potential ideas of where the index could move from here. This current bounce could take the market to that falling trend line which has held up pretty well for three attempts in the past. However, if that gets broken, we could see another test a little higher around the $4060s. So, for this week, I am not expecting a bottom to form here, but I do expect a bounce at least to take price a little higher.

UK100

spx500

UK100 looks somewhat promising on the 1D after price runs up 1.5%. Price was quick to come back up from the bounce off the 200 DMA which suggests that a potential break in this wedge formation could happen. If price does end up breaking and closing above this level, we may see a run higher towards the 7620s.

How to Trade GBPUSD Now.

GBP/USD continued its multiday rally this morning, jumping over 160 pips intraday. After finding strong support at the 1.22 level last Friday as US import prices month-over-month remained static despite expectations, bullish momentum continued Monday as net foreign investment in US securities was far lower than expected. This price action was exacerbated today by positive news for the pound as the UK’s Office for National Statistics revealed higher than expected average earnings for employees, and a national unemployment rate of 3.7%, below the anticipated 3.8%. Let’s take a closer look as we discuss how to trade GBPUSD now.

Fundamental Analysis

In terms of fundamentals, the UK and the US currently share a few noteworthy similarities: both countries’ central banks have benchmark interest rates at approximately 1%, and the UK’s unemployment rate is a mere 0.1% greater than the US. However, the differences are many, and significant. Gross Domestic Product in the US most recently contracted by 1.4% quarter-over-quarter compared to modest GDP growth in the UK, while US inflation year-over-year declined by 0.2% while year-over-year inflation in the UK continued to sharply rise.

These numbers are arguably something of a façade for GBP/USD bulls though, as the case for the USD against the GBP is far more compelling: a) the Federal Reserve is comfortable with more hawkish moves than the Bank of England, recently resorting to a 50 basis point rate hike rather than the more palatable 25 basis point hikes; b) inflation in the US is stronger than year-over-year data implies, because month-over-month inflation is still going strong, which is relevant considering year-over-year inflation in the US is still over 1% higher than in the UK; c) trade in the UK is still marred by post-Brexit messiness, as evidenced by recent tensions with Sinn Fein, Northern Ireland’s new ruling party, over established borders and trade relations.

Any traders on the lookout for a fundamental catalyst before entering a position in GBP/USD should keep their eye on two anticipated events: Jerome Powell due to speak about US inflation at 2 pm EDT today, and the UK’s year-over-year CPI data, due tomorrow morning at 2 am EDT.

Technical Analysis

Technical indicators are currently offering rather mixed information. On one hand, price action reversed course upon finding a powerful support level at 1.22, and has now broken out to the upside of the nearly month-long steep trend line, and corresponding moving averages, that have been serving as a resistance level. However, when we look at the bigger picture, these bullish signals are put in check by the stark reality of a year-long bearish trend that has seen the pair plummet from 1.42 to 1.25. We may well see a retest of resistance at 1.26, where I personally plan on entering a short position, with the hopes of taking profit at 1.22.

Sentiment Analysis

According to A1 Trading’s EdgeFinder tool, retail sentiment is rather neutral, with 52% of retail traders going long on GBP/USD while 48% go short. This contrasts with the degree of institutional sentiment in the US, as the current Commitments of Traders (COT) data reflects over 76% going long on the USD, while just over 21% are going long on the GBP. This sentiment fits the current global economic climate as well, as traders will likely continue to flock to the US Dollar as a safe haven asset as recession fears linger around the globe.

A1 Trading Edgefinder GBPUSD
The A1 Edgefinder's Forecast on GBPUSD

Key Takeaways

  • While fundamentals are mixed, a more aggressive Fed, higher US inflation, and trade concerns for the UK make for a convincing bearish argument.
  • Traders should be ready for Jerome Powell’s appearance today and UK inflation data to cause some GBP/USD volatility.
  • I am planning on selling GBP/USD at the 1.26 resistance level and aiming to take profit at the 1.22 support level.
  • Technical indicators are mixed, but we are still seeing a year-long bearish trend.
  • Traders appear to be overall bearish on GBP/USD, especially at the institutional level.

Global stock market investors may have gotten way ahead of themselves after the recent moves that were made by major countries' monetary policies. Right now, markets around the world are broadly down after several days of gains.

Treasuries Surge

10-year US treasuries have reach a new high for the first time in three years at 2.4%, and the yield is currently sitting at 2.33%. This is likely due to the Federal Reserve's tighter monetary policy after a 25 bp hike in interest rates. Powell's remarks regarding inflation suggests that we will expect a more hawkish Fed which could lead to higher USD/bonds, lower stock market prices. And this is true for other countries like England, New Zealand and the Euro-area eventually.

Global Stock Market Setups

SPX500

global stock market

SPX500 is down nearly 1% on the day after concerns resurface about the Fed's hawkish stance towards the dollar. This could just be a natural pullback in the market rally where the index could find support around $4421. So, price could fall another 1% from the current price if it can't catch a rebound before then.

UK100

global stock market

UK stocks are coming off the highs as well for some kind of retracement. Below, the index can find support around the 200 DMA as well as the the 50% and 61.8% fib levels. That would be a 5% and 6.25% drop respectively from the current price.

DEU40

global stock market

German stocks actually look the weakest here on the 1D timeframe after a rally from the lows in the 12,400s. Price is nearing resistance in the 14,800s which is also coupled with the 50 DMA and 61.8% fib level retracement. It is a much less liquid market so spreads are not as tight, and big moves could show up as gaps on the chart.

Overall, investors need to watch their leverage and risk as always, because this is when that method comes in handy.

Why will US markets be flat or worse?

On December 15th the Federal Reserve Board of Governors made a press release detailing their plans to reduce their open market operation purchases in 2022. The central bank also predicts several rate hikes in 2021, and continuing on into 2023. When you combine this with the current overvalued state of the market, there's good reason to believe that we will see a minor correction, or a mostly flat market.

1. Fed Tapers Asset Purchases.

Fed Open Market Operation purchases of bank bonds and other assets of buoyed up the stock market. SPY and Fed assets look like virtually the same line. Running a correlation on SPY and Fed purchases from 1/2/2021 yields an astounding correlation between the two of 0.8537, or 85.37%. We hardly EVER see this much influence by the fed

2. Interest Rates

Rates have an inverse relationship with the market. When rates go up, stocks go down. What we want to know is how much rates will increase and how many hikes there will be. The Fed has indicated that there will be three hikes in 2022.

3. Overvalued Stocks?

  • The market is historically overvalued right now as per the SPY P/E ratio. We have only seen these levels near the 2008 Financial Bubble and the Dot Com Crash.
  • An overvalued market that is dependent on Fed intervention and low interest rates is about to get higher interest rates and less Fed support.
  • I’m not saying we are going to experience a crash, but it is more likely that the stock market will be flat for a good portion of 2022, IF the Fed does what they say they are going to do.

Three Alternative Markets to Consider:

  1. King Dollar: The dollar has had an excellent run, as most FOREX traders know. But for all the reasons I mentioned above, you can expect it to do better in the long run. Less FED asset purchases and rate hikes will increase the USD's value relative to other currencies and traders should expect further gains in the new year
  2. Gold and Gold Miners: Downward pressure on US Equities and the FED backing off of support may scare investors out of the traditional equities. Two options for the prospective traders is your standard XAU pairs and gold miners. If you are unable to trade stocks on US markets, I recommend looking for gold miners on exchanges that are available to you in your own country

3. Emerging Markets and Heavy Industry related currencies in South East Asia and Pacific Economies
AUD, NZD will benefit form the gains in emerging markets in South East Asia. This year alone, Vietnam a 34% increase in their largest stock index. Because these are the largest regional speculative currencies in the area, FOREX traders looking to benefit from the gains in emerging economies would do well to consider AUD and NZD pairs.

For questions and comments, you can reach the author at smstreb97@protonmail.com or through the A1Trading discord at @smstreb97

Hey everyone! Welcome to this week's forex forecast for the week ending December 17th, 2021. I'm TraderBart with A1 Trading, and this week I'll be looking at AUDUSD, EURUSD, EURAUD & XAUUSD. This will be the final WFF of 2021 as I'm going abroad to spend time with family. Hope everyone has a Merry Christmas and a Happy New Year, and I will be back from mid-January to continue this series of articles.

AUD/USD

Price recently broke out of the ascending channel, making a touch of the 0.70 key horizontal level which dates back all the way to September 2018, and is now on its way to potentially making a touch of the ascending channel. Look out for whether we see price re-enter the channel, suggesting further bullish moves towards the channel's top OR if we see price reject the channel's bottom, suggesting further bearish moves towards 0.70 and potentially new recent lows.

EUR/USD

Price is forming a triangle pattern following the break of the descending channel. Watch out for a break of this pattern, if we see a break above, look out for the retest and rejection before potentially going long. If we see price break lower, look out for the retest and rejection before going short. A break above 1.14 opens up price to 1.16; a short-term key level.

EUR/AUD

After breaking out of the ascending triangle pretty early, price has made its full move but is now retesting the pattern's resistance at around 1.57 which is the same as the ascending triangle from May earlier this year. Watch out for a rejection of this level, where following successive price action confirmations would be a potentially good time to go long on this pair.

XAU/USD

Gold continues to consolidate for another week, still failing to break below 1765 suggesting its potentially waiting for a major catalyst to create a new trend in the market. Price will likely be slow during the Christmas and New Years period.

For any questions or comments, you can reach me at @TraderBart on Telegram or @TraderBart#2638 through the A1Trading discord.

Hey everyone! Welcome to this week's forex forecast for the week ending December 10th, 2021. I'm TraderBart with A1 Trading, and this week I'll be looking at USDCAD, EURAUD, GBPJPY & XAUUSD.

USD/CAD

Price is now consolidating at the resistance of the previous ascending triangle pattern at 1.283. Over the next week, lookout for a potential break of this level, this opens up price to levels such as 1.293 and 1.31. If price fails to break this level, it's likely it will continue acting as resistance and instead, we could see a bearish run back down towards 1.258.

EUR/AUD

Price is now just below a short-term key horizontal level 1.618 following the break of the ascending triangle and horizontal level 1.59. Over the next week, look out for a potential break above 1.618 which suggests a bullish run to follow, opening price up to 1.635 and potentially new higher highs.

GBP/JPY

Looking at G/J in the long-run, price is definitely failing to make a new trend and break yearly highs at around 156.0-158.0. Price is currently making its fourth recent touch of 149.0 and over the next couple of weeks, a break below this level suggests potential long-term bearishness towards 129.0. If price reverses and instead stays above, it's also potential we could still see new highs being made. This is a long-term view so would need to look over the chart for months.

XAU/USD

Gold is continuing to stay above the long-term level 1765 and no major moves were made over the past week. Price did reject 1800 which suggests we could be seeing potential bearish moves coming up. A break below 1765 opens up price to levels such as 1725 and 1675. If price continues to stay above 1765 over the next week, it's likely we could be seeing price coming up to retest previous levels such as 1800 and 1835.

Hey everyone! Welcome to this week's forex forecast for the week ending December 3rd, 2021. I'm TraderBart with A1 Trading, and this week I'll be looking at EURUSD, GBPUSD, GBPNZD & EURAUD.

EUR/USD

Price has fallen below the key horizontal level 1.14 which was seen as clear resistance many times in the past, and it looks like price may be going to retest this same level to either confirm as clear resistance or potentially make its way above this level again. Look out for price action confirmations as to how price reacts to this level before potentially going short.

GBP/USD

Price has made the next touch of the channel's bottom in this descending channel, and we could potentially see the trend continue and price head towards the channel's top. Look out for how price reacts to the key horizontal 1.342 level, as a break above suggests this whereas if price fails to break above, it's like we could see further downside movement to continue.

GBP/NZD

I've been pointing out that price did hit the bullish OB a couple of weeks ago, and it looks like price is now approaching the first TP just above 1.96 as it's potentially going to go inside this bullish breaker block. If price enters this zone and we see rejections, it's likely price will continue consolidating whereas a clear break outside of this zone higher suggests further bullish moves to continue.

EUR/AUD

Price broke out of this ascending triangle pattern pretty early and has already gone to the short-term key horizontal level 1.59 where it was seen as clear support previously. If price begins to reject this level, it's likely we will see price head back inside the pattern, but a break above suggests further bullish moves to follow, potentially towards 1.62 the next resistance.

Hey everyone! Welcome to this week's forex forecast for the week ending November 26th, 2021. I'm TraderBart with A1 Trading, and this week I'll be looking at GBPUSD, GBPAUD, EURAUD & XAUUSD.

GBP/USD

Waiting for price to make the next lower low in this medium-term descending channel. Currently, price is struggling to successfully break lower below 1.342. However, we are seeing a short-term bearish flag pattern and price is at the bottom of this ascending channel, expecting a pattern completion and a break lower soon. Looking for targets around 1.33 to make the next lower low.

GBP/AUD

Price has made a successful bullish move following the touch of the bullish breaker block, and currently sitting below a short-term key horizontal level 1.858. If we see price break above this level, look for a retest followed by successive rejections for a continued bullish move. If we see price struggle to break higher, and instead reject this level and head lower, it's likely we could see further bearish moves, and potentially a move back below the breaker block marking this zone no longer valid.

EUR/AUD

Price has fallen underneath the resistance of the ascending triangle pattern back in May, and in the past two weeks, we have seen this same level continuing to act as resistance. Currently, price is once again making its way back to this level again. A break above this level suggests further bullish moves to follow, but further rejections could suggest a move back to new recent lows.

XAU/USD

Gold nearish the bottom of this recent ascending channel, so I'm expecting a bounce off this line and a potential move up higher. We have been seeing price break recent highs such as 1800 and 1835, we did reach as far as 1880 the LV I've been mentioning in the past weeks. Looking for price to continue this move higher.

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