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One of the forex market's worst performers this year now has the potential to become one of the best plays in 2022. On the day, euro is up and is performing stronger against the USD than any other currency as of now. EUR/USD is up 0.36% today.

Euro To "Positive Territory At The End Of The Third Quarter"

This week, ECB president Lagarde pointed towards a higher rate on the euro and an eventual positive yield by the third quarter of this year. If this were to happen, interest rates would have to be somewhere around a 50 bp hike by Q3. Although bank rates are still negative, we are seeing signs of a momentum shift with the stock market as well. If we start seeing risk-on sentiment on a global scale, the euro is likely to perform well on the upside.

euro
https://tradingeconomics.com/euro-area/interest-rate

A good thing about this recent statement is that investors may still be trying to price it in. The reason this could be very beneficial to investors is that bank rates in Europe have not been risen in over ten years. Policy makers might have realized that they have little choice in the matter as the rest of the world is moving towards tighter monetary policy in the future. Either way, it is a good sign for euro strength and has led to increased investor demand for the day.

Going Forward

It seems that, regardless of today's spike and the performance of last week, the euro still has room to run especially if global economies can start showing signs of growth again like the US's latest jobs report. Being out of negative territory like Lagarde said could either mean rates will hit 0% or somewhere above 0%. And it is still unclear as to whether the rate of change will be a more aggressive 50bp hike versus two hikes of 25bp. A more aggressive stance is better for the currency.

As long as the job market comes back in the Euro-area, these changes in monetary policy could end up being beneficial to the euro overall.

Euro Setups

EUR/USD

euro

This pair has a long way to go before it looks bullish on a technical scale. There is a clear level of resistance in the way at 1.07577 followed by a falling trend line on the 1D timeframe. So, there is still a chance that the pair turns back the other way, but price will likely test that level first.

EUR/JPY

EURJPY looks ready to break out of a tight wedge pattern on the 1D as price comes up nearly half a percent on the day. A hard rejection from the bottom of the wedge looks bullish on a technical scale. If price can break and close above the wedge, a test around the 138.200s looks possible.

EUR/CAD

EURCAD came up to resistance before retracing off that level today. The pair has been making bigger swings in the past couple months suggesting an increase in volatility. Compared to the loonie, the euro might struggle to find the advantage due to the lower inflation, unemployment, and higher GDP.

The FOMC meeting is scheduled for 2:00 pm EST today as the USD is stronger on the day. The stock market remains uncertain as volatility picks up hours before the meeting. We are going to hear sentiment towards monetary policy and thoughts on rate hikes going forward after the latest 50 bp hike.

What To Listen For

It is important to listen to what they discuss regarding interest rates and what it would take for them to loosen their grip on such tight policy. If the Fed mentions a concern for the slowing of the economy, then they might take measures to let up on the aggressive hikes.

Additionally, the Fed's aggressive 50 bp hike on May 4 might have been enough for them to decide on a less aggressive stance. A problem we are facing now is the economy and jobs data. The US has missed several weeks of expectations in unemployment claims. Claims have climbed up to 218,000 from 184K a month ago.

Listening to economic projections is going to be another important thing to do. Judging by the past several weeks, projections may be weak in the short term. At least, this is what I'm expecting them to say. A major concern lies within a possible recession due to a slowing jobs market and higher costs causing less spending. Regardless, there might not be

USD Setups During FOMC

USD/JPY

FOMC

USDJPY came down to the 50 DMA for potential support and is beginning a bounce as investors eye the upcoming FOMC news. Support lies right below around 125.025. If policy continues its aggressive stance towards interest rates, we may find more upside for the pair.

USD/CAD

FOMC

USDCAD is coming off resistance from a falling trend line on the 1D timeframe. Overall trend is still upward, but looks like price is rejecting off today's highs. Increased volatility today could make technicals irrelevant for a little while. Additional support could be below around the 50 and 200 DMA.

GBP/USD

FOMC

GU looks increasingly bullish as today's candle pushes higher today. We might see some higher highs on the day, but it is still likely that the USD will regain strength after the FOMC statements. A tighter policy seems more likely now, so more downside looks to be what's in store for this pair.

The British Pound fell sharply after an unexpected report on PMI data missed expectations by way more than what was forecasted. Most pound pairs are down as GBP/USD dropped -0.62% today. The sterling suffers one of the hardest drops in a long time.

Higher Costs, Slower Growth, and Shaky Economy

Purchasing managers lost momentum for the month of April after a manufacturing PMI reading of 54.6 which missed estimates by 0.4, while services reported 7.1 points lower than March.

https://tradingeconomics.com/united-kingdom/manufacturing-pmi#:~:text=Manufacturing%20PMI%20in%20the%20United,points%20in%20April%20of%202020.

Costs in England have been the highest level in the past few decades. CPI is the highest it has ever been in history which has kept the economy from really improving at all. Businesses have been borrowing less money due recent inflationary concerns and this has caused companies to slash expectations this year. They have also had to increase wages significantly this year so a lot more money is going towards employees. Even with a much higher interest rate than in 2021, stagflation still remains a predominant issue for Great Britain.

Price Action

The pound's behavior has done very poorly against the dollar as outlook continues to be weak. Year-to-date, GBPUSD is down nearly 7.5% and 12% down from the 2021 highs. The overall trend for the currency is a strong downtrend which is struggling to spark a shift in momentum. Every attempted bounce results in another sell off to new lows, so traders on the short side have been able to pick up sell positions at these opportunities.

GBP Trade Setups

GBP/USD (Short Bias)

GU is stuck at a resistance level on the 1D as it has seemed to form a lower high. It looks like the pair is set up for another sell opportunity although the pair has been performing relatively well this past week or so. Due to the strong overall trend to the downside, this bounce in price could be a chance to hop in on the short side once again.

GBP/JPY (Long Bias)

The pound still looks bullish compared to the yen although sentiment is mostly risk-off. The pair has had some more volatile swings this year, but ends up forming higher highs and lows. Price is currently on support which could end up maintaining at this level, but if not, the 200 DMA lies right below that.

GBP/CAD (Long Bias)

GBPCAD might have found a bottom if we zoom far out and find this bottom from September 2019. The past 4 days look promising for the pair although it is hard to tell for sure. However, this level does look heavily discounted within the past 3 years. If price can hold above 1.60927, this might be a bullish sign for the pair going forward.

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

Over the past couple days, the USD has retraced considerably from the highs as the dollar index is lower by another 1% today. A couple of things have signaled that dollar strength has peaked, but USD bears should not be too quick to switch sides just yet. There are still warning signs ahead for the risk-on traders.

Jobs Data

Recent jobs data in the US suggests that the Fed may want to slow their aggressive moves for tighter monetary policy to let the economy improve. Recent unemployment claims missed the mark by 18,000 as analysts were already expecting a higher number of claims than last week.

https://www.forexfactory.com/calendar#graph=122980

The chart above shows actual and forecasted claims from 2021 and 2022. The past six weeks have reported a higher actual number than what was in the forecast. This could eventually lead to a push towards a more dovish stance by the Fed which will lead to less aggressive rate hikes over time. However, it's never a good idea to assume that such a change is going to happen even if signs are present.

Risk-Off Warning Ahead

The cost of goods and services has seen the highest increase in the past 40 years as businesses struggle to catch up to higher wages. Too many signals like the lack of Fed intervention, high inflation, war in Ukraine, higher bond yields, tighter monetary policy; they are all adding to extreme levels of volatility. The problem now is when things will begin to subside and sentiment towards expansion will continue.

It's too early to tell. I wouldn't be punching the gas on bullishness and risk-on just yet. Although we've seen a considerable retracement from the USD highs, there is still a lot in the way. If anything, it looks like another opportunity to get back into long positions on the USD. Here are a few pairs that could have potential in the dollar's favor.

USD Pairs To Watch

GBP/USD

GBPUSD flew up 1.30% on the day as price still hangs around the resistance level on the 1D timeframe. Recent price action may suggest a higher move, but that may only be a setup for more bearish moves to come. More resistance lies in the way around the 1.26400s and the 50 DMA right above that, but price needs to break and close above the current level for this to seem likely.

USD/JPY

USDJPY struggles to move higher as the pair forms lower lows on the 1D. However, clean support lies just below at around the 125.100s which is also paired with the 50 DMA. For investors still long USD, this could be a decent opportunity to enter another long position on the dollar. The extremely harsh move to the upside from March suggests that price could be set to continue on this move but is only retracing for long setups.

AUD/USD

AUD/USD is breaking above resistance and shows a strong move to the upside similar to GBPUSD. However, price is now about to face clean resistance around 0.70859. It looks like a move higher will likely happen, although it's important to watch for the same kind of volatile move back to the lows. A failed break at this current resistance level may be a sign for more downside.

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

The dollar index (DXY) is up another 0.24% today as price touched new highs around $104.20. USD is largely stronger today, and some key factors suggest that the dollar could be strong for the entire week. So, here are some reasons why you should buy USD now that we are at the start of a new week of risk-off sentiment.

Fed's More Hawkish Than We Thought

A statement by Fed chairman, Jerome Powell has caused more uncertainty in the market. He mentioned that a 50 basis point or higher rate hike would be "on the table"- a substantial rise from the original and doubling the <25 bp expectations. That statement ended up coming to fruition last week during the Fed rate decision. This sent the stock market spiraling downward while the USD got stronger. For a brief moment, stocks and risk-on pairs started to look bullish, but that rally did not last long at all.

Inflation has become way more serious than we initially thought as well. The US is now sitting at a whopping 8.5% inflation rate, a multi-decade high. It is hard to tell when the dollar will shift back to bearishness, but for this week at least, it looks like USD will be strong.

Bond Yields

US 10-year treasuries hit above 3.1% today and are hovering around 3.07% at the time of writing this. Yields are stating to look way more attractive than they were at the end of 2021 and the start of this year. In volatile market swings, investors are probably more interested in preserving their capital and keeping it somewhere safe like in the USD right now.

USD Trade Setups

USD/CAD

buy usd now

USDCAD just broke above a significant top on the 1D timeframe suggesting that the pair has broken out of its sideways trading. If the pair can close above this level, it would solidify this move and investors should be more inclined to long. On the other hand, price could also retrace after making this higher high and come back to support around 1.29154.

AUD/USD

AUDUSD fell to a key support level again on the 1D timeframe. This is a triple bottom for the year, but it looks like the pair will probably break under due to the amount of tests and failed rallies over time. if this level gets broken, we could likely see a test around 0.66751 where there is another level of clean support which is 4.5% below current price.

EUR/USD

Price is pretty unstable around this level on the 1D as we see long wicks from hard swings in both directions. Although this could be a minor rebound from the lows, price could fall right after testing resistance around 1.07673 if it does not break new lows before then. This long term downtrend will probably continue until we see a substantial fundamental shift in sentiment.

A big warning sign is occupying the minds of investors as a new wave of the virus in China emerges. City-wide testing in Shanghai and Beijing have been going on for the past couple days. Investors fear another potential lockdown in these cities. This is not just impacting the Chinese economy but global indices as well.

Global Indices Plunge

SPX500, NAS100, UK100, and NI225 are all down today while NAS leads in the losses and is down 2.68% at the time of writing this. If China were to announce another lockdown, stock markets around the world would continue to tumble. Another problem facing US stocks is a mixed earnings season. This factor paired with a shift in money to bonds adds to the overall bearishness.

Very little open interest on the COT side also suggests that we are not yet ready to see stock market gains for the time being. What's happening now is a myriad of headwinds in the way, and the market can't really cope with everything going on. An alarming rise in uncertainty usually results in sporadic behavior and eventual sell-offs. It looks like the bearish sentiment will likely continue until we get past quarterly earnings and concerns in China ease.

Setups To Watch

global indices

SPX500 fails to shift in direction after yesterday's bullish hammer candle. It looks like price will eventually fall to support around $4181 where there is a double bottom on the 1D. However, if by the end of the day the index shows another day of rejecting the lows, we might see a higher low established.

NAS100

global indices

NAS100 is in the same boat except yesterday's gains were erased just from this morning's performance. What we could see is a rebound at the double bottom as rejection from the lows would be bullish on a technical perspective. However, if price cannot maintain above this level, we could see a fall to the $12,600s.

UK100

global indices

This is very much looking like a short setup on the 1D. Price has already crossed under the 50 DMA and heading lower towards the 200 DMA. Price action suggests that the index will hit the 200 before it finds any clear support. Lower highs also suggest that price is not done with its bearish move.

After breaching the $100 level, DXY is still remaining strong today. Price action on major USD pairs has been considerably volatile since the Asian session last night and futures market this morning. Here are some USD pairs to watch this week as the world remains in uncertainty around geopolitical events and hawkish stances around monetary policy.

USD/CHF

usd pairs to watch

This pair continues to move higher as higher highs and lows are made the 1D timeframe. A couple levels of support could help keep price running higher should price touch down to the 0.93720s. Although the dollar looks overbought right now, it doesn't look like the momentum is ceasing. This strong move to the upside could continue throughout the week.

COT: Institutions are increasing both their long and short positions on the USD. However, the number of short contracts on the Franc have jumped from the previous week while the number of long contracts are shrinking.

EUR/USD

usd pairs to watch

EURUSD largely moves close to the performance of the US and UK equities markets. When stocks are bullish, so is EU and vice versa. Now, stocks have been down for the most part in regard to the rising interest rate, record inflation, higher bond yields, etc. investors are less attracted to the riskier Euro investment and flock to the safe haven currency.

Price looks like it might retrace from the lows and make a move upward. If so, the pair might go to the 1.09200s to test resistance. This could be a good short entry on the pair. If price fails to move higher, we can expect lower moves towards the 1.07330s.

COT suggests that price could move up this week due to the spike in long contracts from last Friday's report. However, price has yet to reflect that move.

AUD/USD

usd pairs to watch

This pair comes in a mixed bag as both gold and USD's performance have been mostly bullish in the past month. The conflict in eastern Europe is raising demand for the gold bullion while the inflation fears around the world is helping the USD.

On the 1D timeframe, price has come down to clean support on a rising trend line and the 50 DMA which could serve as a great long entry. However, a potential stronger USD throughout the week could cause a break in this level and take price to the 0.72860s.

Big money has upped their stakes in long contracts on both the precious metal and on the Aussie. So, we may in fact see another run to a higher high.

Over the past couple weeks, New Zealand's kiwi has not been performing to the expectations investors expected. Analysts expected another 25 bp rate hike on Tuesday, but they were surprised by a 50 bp hike that took the interest rate up to 1.50%. So, why isn't NZD taking off right now? Here are some factors for and against buying kiwi.

Reasons For Buying Kiwi

Like the above statements, the Regional Bank of New Zealand decided to push past expectations of the original 25 basis point hike this month. This caused a drastic rise in kiwi's demand followed by a stark sell off in the moments after. A quicker rush to tighten monetary policy could be a good sign for bullish kiwi investors as the currency is outpacing other major countries.

New Zealand is also looking at a potential shift into recovery mode regarding the GDP growth rate. The second half of 2021 actually reported a decline of -0.20% after a significant rise of nearly 18% in the first half of that year. In 2022 so far, their GDP saw a positive rise in the growth rate.

buying kiwi
https://tradingeconomics.com/new-zealand/gdp-growth-annual

If NZ can continue this kind of performance on top of the higher interest rates, it would be hard to find a reason not to consider going long on the kiwi.

Reasons Against Buying Kiwi

Considering the factors above, there is a chance that investors may be worried that the more aggressive monetary stance will start to place hindrances on the economy. Investors want to see economic growth, an increase in spending, etc. However, with much higher interest rates than expected in a shorter amount of time, this could lead to a slow in growth as people stop spending as much and begin saving more.

The Kiwi is also not gaining much institutional interest overall. COT data shows us that big money reduced their long positions while increasing their stakes in contract shorts. Overall open interest was not impressive either, so it seems like institutions are not here to cause any major shifts in direction and we may have to rely on short term retail transactions. Having said that, it looks like retail is mixed.

Kiwi Setups

NZD/CHF

Retail is majority long on this pair as it has been on an uptrend since February. Price has bounced off support on the 1D timeframe, and now it faces resistance around a falling trend line. An important thing to look for here is a break and close above that trend line which would indicate further highs.

NZD/USD

This pair looks like it doesn't have much bullish potential to finishing out this week. Price action on today's candle suggests a further move to the downside as support lies around 0.67114. The overall trend since February is up, however. So, we could see a continuation of this move in the coming months. For the rest of this week, at least, I see the pair moving down to that level of support before finding a bottom.

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