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)
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.
The next few days will likely be full of unusual degrees of volatility in both the forex and stock markets. Let’s discuss why, and how to prepare for it, as we issue an urgent warning: Jackson Hole is here.
What is Jackson Hole?
The Jackson Hole Economic Symposium, often simply referred to as ‘Jackson Hole’, is an exclusive, three-day annual conference sponsored by the Federal Reserve Bank of Kansas City. Held in Jackson Hole, Wyoming since the early 80s, the conference is an extremely significant event for traders and investors, as it is attended by many of the biggest movers and shakers in the global financial markets. Invites are reserved for influential investors, prominent government officials, economists, and central bankers, and media coverage of comments and speeches at the event can heavily influence market sentiment and price action.
Potential Impact on Major Pairs
Jackson Hole is an extremely difficult event to prepare for because coverage is extensive, and any number of off-hand remarks could have dizzying unexpected consequences. With the conference kicking off today, traders should take caution since the forex and stock markets could easily become the wild west over the next few days, with any number of catalysts surfacing.
Tomorrow at 10 am Eastern Time, Fed Chair Jerome Powell is set to give a Symposium speech on economic outlook which will likely address the dual problems of inflation and recession, wherein he will offer hints at Fed policy plans. Depending on whether his remarks are interpreted as hawkish or dovish, this could potentially cause USD to either plummet or soar against other currencies. With a smaller Q2 US GDP contraction than originally estimated, and Core PCE Price Index (the Fed’s preferred measure of inflation) numbers also coming out tomorrow at 8:30 am, traders, Powell, and conference attendees will all have much to chew on.
Possible USD Setups
According to the EdgeFinder, A1 Trading’s market scanner tool that helps traders conduct analysis, here are three of the top-rated pairs to sell for USD bulls. All three have recently hit key support zones, though no breakouts from their clear downtrends have yet to occur. If Powell comes across as particularly hawkish tomorrow, this could prompt breakouts to the downside, and continuation for the existing downtrends. However, if he comes across as dovish, we may see support hold, along with breakouts to the upside, disrupting these downtrends.
This past year has been distressing for economies and markets around the world. From limited supply amid war, geopolitical tensions, and environmental disasters, to scrambled supply chains post-COVID, to flooded money supplies following unprecedented degrees of economic intervention, high inflation has ravaged many countries, and the US is no exception. Given the erratic market behavior that comes courtesy of economic crises, traders and investors may be hunting for safer securities to keep their money in. For those who are looking for the most stable financial assets available, US Treasuries often make the top of the list. Let’s explore when (and how) to buy Treasuries.
What Are Treasuries?
‘Treasuries’ is an umbrella term that refers to many kinds of debt securities for sale via the US Department of the Treasury. Available in short-term T-Bills, 2-to-10-year T-Notes, and 30-year T-Bonds, they are a type of financial asset that enables investors to effectively lend money to the US federal government for a set duration of time and receive a fixed rate of interest in return. Another prominent kind of Treasury are Treasury Inflation-Protected Securities (TIPS), which indexes your money to the rate of inflation in the US.
Why Purchase Them?
Owning Treasuries comes with a variety of benefits that can seldom be found elsewhere among financial assets. Perhaps the greatest perk is extremely low risk, since your purchase comes with a guaranteed return for those holding until maturation, quite different from most financial markets where traders must fend for themselves in terms of risk management. Another factor that minimizes risk is the financial stability of the US federal government, for which bankruptcy is ostensibly impossible.
Are There Downsides?
While there are unique perks to opting for Treasuries over other securities, there are built-in disadvantages as well. For those planning on holding onto a Treasury until it matures, perhaps the most noteworthy is the additional risk of inflation diminishing one’s real rate of return, since inflation is a dodgy phenomenon that cannot be anticipated perfectly.
Combined with frequently low yields on Treasuries the past few decades, there is always a chance that inflation could completely negate the income’s new purchasing power. Additionally, for those who may want to sell a Treasury before its maturation date, there is a significant degree of ‘interest rate risk’ since the security likely won’t have an identical market value to when it was first purchased.
When Are Yields Highest?
If earning passive income is the goal (rather than simply protecting purchasing power via TIPS), timing matters a great deal for the sake of purchasing Treasuries at an optimal price, i.e., receiving a meaningful yield. Historically, higher Treasury yields often correlate directly with a higher federal funds rate (which is intentional, not coincidental), with the 10-Year T-Note yielding over 10% annualized interest in the late 1970s and early 1980s. The more the Federal Reserve raises interest rates, the higher yields are likely to be; considering how hawkish the Fed has recently become to quell high inflation, substantial yields could be around the corner.
How High Could They Go?
If inflation remains a persistent threat, enough for the Fed to continue hiking interest rates according to their most recent projections, the federal funds rate might be raised to a range between 2.9% and 4.4% in 2023. If the fed funds rate does surpass 4% for the first time in over a decade, this may well correspond with the 10-year Treasury doing the same, presenting lucrative buying opportunities for those interested in waiting out high inflation for a longer-term maturation period. It could even be the case that the Fed must hike rates even more severely, in which case Treasury yields could become far greater than currently expected. Currently, the EdgeFinder market scanner rates the US 10-Year and 30-Year Treasuries as a 5 ('buy') and a 6 ('strong buy'), respectively.
Ways to Buy
Anyone may purchase US Treasuries from the US Treasury Department via the TreasuryDirect website, at recurring auctions you can track throughout the year. However, one may also buy or sell Treasuries through a variety of banks, brokers, and exchange traded funds (ETFs).
• In times of market turmoil amid economic uncertainty, it can be helpful to consider safe securities to invest in. Among these options, US Treasuries historically reign supreme.
• There are several different kinds of Treasuries which have different maturation lengths, including T-Bills, T-Notes, T-Bonds, and TIPS (which are indexed to inflation).
• US Treasuries are debt securities backed by the US federal government. They enable buyers to lend money to the US government in exchange for fixed interest payments.
• There are certain benefits to owning Treasuries that are quite rare for financial assets. Chief among them is a near absence of risk, as fixed interest payments guarantee specific returns and the chances of the US federal government going bankrupt are near-zero.
• However, there are downsides to owning Treasuries too. Perhaps the biggest risk for those holding on until maturation is that the severity of inflation will impact the real rate of return.
• For those who may want to sell a Treasury before maturation, there is ‘interest rate risk’: the Treasury’s new market value may have depreciated from the time it was purchased.
• Thus, to maximize income from Treasuries, it is helpful to wait until Treasury rates are optimal. Historically, the higher the US federal funds rate is, the better Treasury yields will be.
• Depending on how high the Federal Reserve sets the fed funds rate, it is possible that the 10-Year Treasury yield could cross well above an annualized rate of 4% for the first time in over a decade. This rate could potentially far outlast high inflation, bolstering returns.
• While all kinds of Treasuries are available directly through the TreasuryDirect website at recurring auctions, they are also available for purchase through brokers, banks, and ETFs.
News for USD/TRY
Today, Turkey’s citizens and the financial world received astonishing news: Turkey’s central bank, the Central Bank of the Republic of Turkey (CBRT), decided to lower interest rates amid an inflation rate just shy of 80% year-over-year. The CBRT cut rates by a full percentage point, down to 13% from the previous 14%. Most orthodox economists appear to be baffled by this act of stimulus as Turkey grapples with a years-long economic crisis that has burdened the country with stagflation and a rapidly depreciating lira. Thus, it is almost universally regarded as a complete monetary misstep, as reflected in USD/TRY currently soaring 0.62% intraday.
This dovish decision appears to be due to a concerted effort by Turkish President Recep Tayyip Erdoğan to influence the CBRT and deter them from their policymaking responsibilities. He has frequently tried to force their hand into preventing hawkishness, referring to interest rates as “the mother of all evil.” There are multiple factors contributing to this unique position of his, including esoteric views on the effects of interest rates (it is well documented that he believes interest rate hikes somehow cause inflation) and religious convictions. Given the ideological rationale behind these stances, as well as his increasingly authoritarian leadership, it is unlikely the CBRT will be able to pivot towards practical hawkishness anytime soon.
According to the EdgeFinder, A1 Trading’s helpful market scanner for those desiring supplemental analysis, USD/TRY remains the top-rated pair for bulls. Earning a score of 5, or a ‘buy’ signal, USD beats TRY in every listed category besides GDP growth and interest rate divergence. However, given Turkey’s rampant stagflation issues that have only been exacerbated by recent high energy costs, as well as ‘real’ interest rates in Turkey being estimated at -16%, USD/TRY appears to have buying potential for the foreseeable future.