With the holiday season lingering on and a new year on the cusp of arrival, traders may glance at the calendar and notice there is not much economic news to anticipate on Friday to cap off a light week. In situations like these where there can be lulls in bullish and bearish momentum due to a lack of fundamental catalysts, it can be helpful to remember that abstaining from trading is often its own discipline. With this in mind, let’s consider three ways traders can be productive during bouts of time where financial markets may not yield many trade setups. After all, the art of not trading is hard to navigate, but is essential for remaining profitable.
This may seem obvious or cliché at face value; however, guaranteeing meaningful rest for yourself is of the utmost importance when it comes to excelling in any skill. Just as athletes and manual laborers need rest days so that their muscles can adequately repair, time off from purely mental activities like trading is crucial for avoiding burnout and preventing recklessness. Besides simply making an effort to spend time away from the trading environment, ensuring a certain quality of rest can be quite helpful as well. Whether that means indulging in some extra sleep, spending time with old friends, exercising at the gym, or making time for an often-neglected hobby, good rest takes many forms for everyone. Whatever that happens to be for you, fitting restfulness into your lifestyle truly is an aspect of healthy trading, not a departure from it.
Because trading is a game of risk management and probabilities, setting aside time for pouring over historical data can be of great benefit when it comes to exploring a strategy. Whether you are considering implementing a brand-new approach or polishing a formula you judge to be tried-and-true, subjecting any strategy to backtesting is always time well spent. For those interested in learning more about how to backtest, feel free to watch this video and much more from A1 Trading’s YouTube channel, and explore a selection of Metatrader Trading Software offered here.
It often appears to be the case that many retail traders fall into the trap of over-relying on technical analysis over fundamental analysis. While reading charts and utilizing technical indicators can be incredibly helpful, it is important to remember that currencies, equities, and commodities are real things with actual value, and that their worth is not reducible to patterns on a screen. Investing your time in conducting fundamental analysis, such as reading up on the economic performance of the host country of a currency you trade or keeping up with news about the geopolitical tensions influencing a commodity’s availability, can be illuminating. By making an effort to understand the nuances of a particular currency pair or other asset, you may find that your biases as a trader grow more nuanced as well. For those interested in using a market scanner that offers supplemental fundamental analysis, the EdgeFinder is fantastic.
As another dense news week draws to a close and financial markets continue to react to the latest flurry of interest rate hikes around the world, it can be helpful for traders to recenter on key biases. Before the weekend fully arrives, let’s check in with the EdgeFinder, A1 Trading’s market scanning software, to take note of the various ‘strong’ signals that have been generated in preparation for next week. The following list is composed of the 5 strongest pairs to trade according to EdgeFinder analysis: they are listed with their respective ratings, signals/biases, and corresponding charts. Additional fundamental and technical commentary will be provided accordingly.
1) USD/CAD - Earns an ‘8’ Rating, or a ‘Strong Buy’ Signal
2) NZD/CAD - Earns a ‘6’ Rating, or a ‘Strong Buy’ Signal
3) EUR/JPY - Earns a ‘6’ Rating, or a ‘Strong Buy’ Signal
4) AUD/NZD - Earns a ‘-9’ Rating, or a ‘Strong Sell’ Signal
5) GBP/NZD - Earns a ‘-9’ Rating, or a ‘Strong Sell’ Signal
Besides providing and consolidating robust fundamental analysis for retail traders to have on-hand, the A1 EdgeFinder can be especially helpful in the realm of sentiment analysis. By utilizing the software’s sentiment analysis features, traders can routinely keep up with how other traders, both institutional and retail, are allocating their capital. This matters a great deal because price action within financial markets is generated by supply and demand, which means that monitoring the aggregated demand of institutional or ‘smart money’ traders (who often have the most capital to work with) offers valuable insight into price action within these markets. With this context in mind, let's explore 3 top smart money securities as presented to us by the EdgeFinder’s Smart Money Tracker, which gathers and parses the latest Commitments of Traders (COT) data.
1) USOil – 82.47% Long, 17.53% Short
2) USD – 72.9% Long, 27.1% Short
3) Gold – 68.58% Long, 31.42% Short
This morning, at 8:30 am Eastern Time, the Federal Reserve Bank of Philadelphia released an unfortunate batch of news for the US economy. The Philadelphia Fed Business Outlook Survey, otherwise known as the Philly Fed Manufacturing Index, which surveys over 200 Philadelphia manufacturers on a monthly basis, indicated worsening business conditions this month. While a score of -5 was anticipated, and would have already been a pessimistic indication, the real number was a bleaker -8.7. Considering that American manufacturing is a crucial component of US exports, these disappointing conditions ostensibly highlight the toll that a strong US Dollar is taking on trade, which carries negative implications for US GDP growth, or the lack thereof. With USD falling on the Philly Fed News today, monetary tightening-induced recession fears continue to haunt financial markets.
End of the Road for USD?
While the USD bullish run cannot last forever, a reversal currently seems unlikely anytime soon. High core inflation and hot labor markets are still incentivizing the Federal Reserve to continue their aggressive rate hike strategy, which they show little sign of stopping, regardless of UN criticism. Those bullish on USD may want to watch bearish movements like these for potential trade setups, which could yield potential discounted opportunities for going long on the Greenback.
Three Potential Pairs to Trade
According to the A1 EdgeFinder’s market analysis, the following pairs rank favorably for those interested in going long on USD. They are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CHF (Earns a Score of 4, or a ‘Buy’ Signal)
2) EUR/USD (Earns a Score of -5, or a ‘Sell’ Signal)
3) AUD/USD (Earns a Score of -4, or ‘Sell’ Signal)
Many retail traders are likely aware of how US Dollar strength has surged to decades-long highs over this past year. This is primarily due to the Federal Reserve’s hawkishness in response to staggering increases in the cost of living, as well as USD safe haven status as the world teeters on the brink of a global recession. While major pairs such as GBP/USD and EUR/USD are particularly popular for those aiming to go long on USD, there are other promising, less frequently traded pairs that are worth watching as well. Here are three such USD pairs to consider, all of which are viewed favorably by the EdgeFinder, A1 Trading’s market scanner software. These 3 surprising pairs to buy are listed in order of favorability, i.e., their respective EdgeFinder ratings and biases, along with some additional technical and fundamental analysis.
1) USD/CAD (Earns a 5, or ‘Buy Rating)
This pair is a bit unique in terms of fundamentals, because a portion of Canada's economic performance is predicated on exporting energy to the US, a primary trading partner, knitting their economies together. Regardless, the US economy has remained far hotter than Canada's, which reflects accordingly in the COT data above, as institutional traders clearly favor USD over CAD. Price action is retesting the lower depicted zone as support following a stunning breakout to the upside of trendline resistance in September.
2) USD/TRY (Earns a 5, or ‘Buy’ Rating)
This pair is an unusual case that might spook newer traders; after all, wouldn't fundamentals favor the currency with the higher interest rate, and high inflation to match? However, that has not been the case here as Turkey grapples with horrific stagflation, much of it due to the Lira's near collapse in value. Turkey's interest rates have not been allowed to rise accordingly in order to mitigate hyperinflation, sending this pair to historic highs. It appears a breakout to the upside of resistance may be occurring.
3) USD/ZAR (Earns a 4, or ‘Buy’ Rating)
South Africa's economy is one of Africa's strongest, having grown rapidly over the past few decades post-Apartheid. However, many structural problems remain, including an unemployment rate exceeding 30%. Similar to USD/TRY's fundamentals in a sense, this is another case where interest rate divergence is not as compelling for forex traders, since South Africa's economy is not overheating in a comparable way to the US. It appears that recent price action may have found a key support zone prior to trendline support.
Last week’s selloff was brutal for investors in the US stock market: the Dow Jones Industrial Average closed at its lowest level since late 2020, falling to 29590.41, losing 1.6% on Friday alone. With the S&P 500 currently down a whopping 23% from January’s highs this year, and other indexes close behind percentagewise, stock market bulls are understandably desperate to find any event to warrant optimism. Unfortunately, despite some respite from US inflation in July and August, there does not appear to be much reason to expect this selloff to stop anytime soon. With bearish momentum emerging for equities, and fears about an impending crash and recession growing, we have no choice but to get ready for the bear market.
What is a Bear Market?
Technically speaking, there is no strict definition for a bear market, since it is a more colloquial term than an exact set of financial conditions. However, it is generally agreed upon that when analysts refer to a bear market, they are discussing a financial market or index that has lost at least 20% of its value from recent highs. It is also worth noting that a bear market can occur without that market crashing, since a crash often refers to a dire situation in which said market loses at least 10% of its value in a single day.
Why is This Happening?
Many factors can contribute to a bear market, ranging from trade and foreign policy issues, to market-generated financial crises, to fiscal and monetary policy. In this particular situation, there appear to be two interrelated key catalysts creating a looming bear market in the United States:
1) An extremely hawkish Federal Reserve that is in eager pursuit of contractionary monetary policy, with economic growth being sacrificed accordingly. Chair Powell recently emphasized this at the FOMC press conference by explaining that for now, the Fed can only fulfill its ‘dual mandate’ by focusing on stabilizing prices at the expense of high employment, for the sake of eventual maximum employment. Stocks are not just a casualty in the effort to reduce high prices, they are a primary target.
2) Poor economic forecasts for both businesses and consumers, tied together in a vicious cycle. High interest rates will make it difficult for businesses to borrow or attract investors, as their high-risk shares and bonds will be far less lucrative compared to low-risk alternative securities. This nearly guarantees that they will have less capital to spend on employees, reducing employment opportunities and triggering layoffs for workers who are already struggling under the weight of high inflation and costly debts. These workers will then likewise spend even less, guaranteeing lower revenues for businesses accordingly, further impeding growth.
How Severe Will It Be?
For better or for worse, because of how unpredictable markets are by nature, we are effectively unable to know just how severe this bear market and recession could be. However, between the Federal Reserve’s far-from-spotless track record (2022’s hawkish Powell is, in fact, still the same person as 2021’s dovish optimist who dismissed inflation as ‘transient’), as well as the inherent lags in inflationary data such as Core CPI, the Federal Reserve could easily overshoot their tightening effort and create a depression.
This seems especially possible considering how badly the stock market has been hit while the labor market remains hot; these selloffs may become far worse as unemployment rates begin to increase, particularly if high global food and energy prices remain a problem for US consumers. However, because this hawkish monetary policy mission is consciously created by the Fed, rather than being the result of a structural failure as per the Financial Crisis of 2008, there is a chance that a meaningful economic recovery could be implemented more quickly than in decades past.
What Can Be Done?
Sadly, little can be done by working people to prevent a bear market from occurring beyond a miraculous, coordinated effort to voluntarily reduce consumer spending across the United States. Even if volatile food and energy prices continue to fall in a similar fashion as over the last few months, the Fed would still likely keep their eye on core inflation for a more complete picture. This downturn is being induced at an institutional level and is ostensibly unavoidable.
Nonetheless, for those who are long-term investors, bear markets also present myriad buying opportunities, as many shares across sectors are available at heavily discounted prices. For those who are patient and have some income to spare, building a diversified portfolio through recurring investments in safe, reputable funds remains a simple way to capitalize on poorly performing indices. While these methods by no means cancel out the horrors of economic suffering, value investing in this fashion offers consumers some semblance of wealth-building agency as we endure this business cycle.
• There have been significant declines in stock market prices since January of this year, with some indices, like the S&P 500, losing over 20% of their value. These trends sadly don’t appear to be stopping.
• A bear market is a term typically used in the context of a financial market or index that has lost at least 20% of its value from recent highs.
• While bear markets can occur for numerous reasons, the primary catalysts behind an impending bear market in the US appear to be hawkish aggression from the Federal Reserve and a bleak outlook for businesses, workers, and consumers accordingly.
• Although the exact dimensions of an anticipated bear market are unpredictable, it seems plausible that its severity could exceed that of current FOMC economic projections, though perhaps last more briefly because it is only artificially induced by the Fed.
• Unfortunately for working people, little will likely be done to prevent this downturn from happening at an institutional level. However, for those who can set aside some money for recurring and diversified long-term investments, buying opportunities will be plentiful.
This week the public received startling news: on Wednesday morning, month-over-month CPI (a proxy for inflation) in the United States had unexpectedly remained static, clocking in at 0% whereas a moderate 0.2% increase had been forecast. Core CPI (which excludes food and energy prices) likewise came in lower than anticipated at 0.3% month-over-month, while Thursday saw the Producer Price Index surprisingly decline 0.5% month-over-month. This prompted a mass selloff of USD across major pairs on Wednesday and Thursday, with the US Dollar Index (DXY) temporarily plummeting by 1.8% from the start of the week while stock indices soared. While demand for USD has recovered a bit since, with the DXY now down only 0.87% from Sunday, it is worth asking: has everything changed for major pairs?
Argument A: The Bearish Case for USD
A 0% month-over-month inflation rate may signal that the worst of price increases is finally over in the US. Annual inflation might have peaked, and consumers can breathe a sigh of relief now that three key events have occurred: 1) energy prices have dropped significantly due to a dip in demand, while US natural gas storage and oil barrel inventories also exceed expectations. 2) The Federal Reserve has embraced monetary policy hawkishness, and their rapid 50-75 bp rate hikes have worked, successfully restricting borrowing and thus curbing demand. 3) Despite a tight labor market, the US unemployment rate consistently hovers around 3.5%, granting a subtle degree of price stability.
Argument B: The Bullish Case for USD
Unfortunately, despite 0% month-over-month inflation being a welcome respite from high inflation, this one piece of data does not capture the full economic picture. Here are three reasons to expect high inflation to continue in the US: 1) though having fallen, energy prices could likely remain volatile and high because underlying global energy supply problems (e.g., mutual sanctions on Russian exports, OPEC’s unreliable output, energy dependence) have not been resolved. 2) Considering the scale of monetary stimulus over the course of the pandemic, and the double-digit federal funds rate that was historically implemented to stamp out high inflation, it would be shocking if these past few rate hikes were enough for the Fed to bring 40-year highs to an end. 3) The hot labor market may cause wages to further play catch-up, contributing to core inflation.
My Bias: Bullish (With a Grain of Salt)
Despite this particular cooling CPI report, I am retaining my bullish bias on USD, though admittedly with less confidence than before. The international and domestic economic conditions at work do not appear to have changed in a significant fashion as consumers still grapple with the consequences of an unprecedented money supply, labor shortages, and energy instability. However, if US inflation data continues to fall behind market expectations, I will certainly reassess this bias.
Best Pairs to Trade
According to the EdgeFinder, A1 Trading’s market scanner that helps traders conduct economic and sentiment analysis, here are two optimal pairs to trade for USD bulls: 1) GBP/USD, which has a score of -7, earning a ‘strong sell’ signal; and 2) USD/TRY, which has a score of 4, earning a ‘buy’ signal.
This morning US investors were greeted to yet another unwelcome, though perhaps not unexpected, decline in the stock market. At the time of writing, the Dow Jones Industrial Average has slid over 300 points today, or over 1%, after recovering slightly from dropping over 500 points earlier this morning. The Nasdaq and S&P 500 have likewise dropped over 1% intraday. While these events are disappointing in themselves, they are part of a recent disturbing downtrend of significant proportions, including a brief dip into bear market territory and the worst performing first half for the S&P 500 in fifty years. Unfortunately, there only appear to be several possible paths forward, with none of them favorable to stock market bulls. Let’s explore what this means for traders and investors as we issue a warning: stock market looking bleak.
Path #1: Selloff by Further Rate Hikes
One likely possibility for the US economy is that the Federal Reserve continues implementing further rate hikes to curb hyperinflation. This seems quite plausible for three reasons: a) high inflation in the US has thus far persisted, with the most recent CPI data for May reflecting a 1% increase in inflation month-over-month, and an 8.6% increase year-over-year; b) historically, high inflation seems likely to continue, considering cooling the similarly overheated US economy forty years ago required double-digit target interest rates; c) Jerome Powell, Chair of the Federal Reserve, has already signaled that the Fed is willing to continue rate hikes as necessary, perhaps even resorting to more 75 basis point ones if needed.
If this comes to fruition, it would likely be bearish for the stock market since the Fed’s past several aggressive moves have ultimately prompted increased selling pressure for stocks. The Fed’s hawkishness particularly affects the stock market because its recent highs were due in large part to COVID-era dovish monetary policy, which shareholders ostensibly can’t rely on anymore.
Path #2: Selloff by Impending Recession
Another plausible possibility for the US economy is that it continues its descent into full-blown recession. Such features include recurring contractions in gross domestic product, higher unemployment rates, and lower consumer spending from the lack of work or decent income. This would likewise be a disaster for the stock market, since its performance is often interpreted as, and anticipated to be, a proxy for the health of the US economy. Low consumer spending equates to less money spent purchasing goods and services from businesses, as well as dwindling confidence and spare capital from potential buyers, sending share prices lower and forcing even more layoffs.
While a recession can theoretically cause low inflation via lower demand, and thus no more need for further interest rate hikes, the stock market would nonetheless be caught in the crossfire. While many economists anticipate recession being likely, if not imminent, even the Federal Reserve acknowledges the risks as they forecast higher unemployment and slower economic growth as unfortunate sacrifices for having stopped hyperinflation via contractionary monetary policy. The US stock market would thus be a central casualty if a recession is induced.
Path #3: Selloff by Stagflation
One particularly disturbing possibility for the US economy is the chance of stagflation, a nightmarish fusion of both recession and hyperinflation. This would entail most aspects of both paths 1 and 2 playing out simultaneously: economic activity would contract as consumers and businesses lose money in a vicious cycle, while prices remain unusually high, exacerbating the effects of recession. This unfortunately seems possible in the US because of how current global supply chain bottlenecks are contributing to inflation by restricting supply, causing the price of oil and other commodities to soar. Thus, there is a significant chance that this tragic phenomenon could occur, which would be doubly disastrous for the stock market.
The Bad News
Unfortunately, it is difficult to imagine a probable scenario in which the US stock market doesn’t plunge deeper into selling pressure. Continued bearishness over the next few years seems incredibly likely regardless of what exact problems deal these next few blows to the US economy. Thus, for any traders who are short-term stock market bulls, please know that the chances of a prolonged, near-future rally for equities seem slim. The US is no outlier, either; the global economy is currently afflicted with these same issues. We will have to weather this economic storm altogether.
Some Good News
However, for those who are long-term investors, any stock market selloffs can be understood as optimal buying opportunities. This is because the US economy, like other market or mixed economies, experiences business cycles: periods of expansion, followed by contraction, rinse and repeat. Due to the US’ abundance of natural resources, huge population, international influence, and more, the US economy is incredibly resilient and able to rebound from recession long-term.
This means that even if fundamentals don’t currently look good for the stock market, they are still promising through the decades, which net favors long-term shareholders and bulls. So long as investors stick to a thoroughly diversified portfolio, investing regularly in historically reliable funds such as index funds and other trustworthy ETFs, and abstain from premature selling due to worries and disappointment, bear markets present bargains for future wealth building.
As the value of a bitcoin continues to depreciate this week, currently holding above the $20,000 support level after having fallen to nearly $18,000 on June 19th, it is worth reflecting on the cryptocurrency’s performance. Certain questions come to mind: has it lived up to investor and user expectations? Is it destined for endless cycles of volatile buying pressure and selling pressure? Is it worth buying these dips, or is it just a pyramid scheme as many economists have claimed? Is it a true alternative to fiat money as its mysterious inventor, Satoshi Nakamoto, ostensibly hoped it would be? Let’s explore these concerns, and the merits of Bitcoin, as we ask the central question: is Bitcoin worth buying now?
Supposed Benefits of Bitcoin
According to Bitcoin apologists, there are myriad benefits that warrant use of, and investment in, this cryptocurrency. Chief among them is its ‘decentralized’ status: rather than being issued, regulated, and influenced by a central bank and government, as is the case with fiat currencies, Bitcoin is liberated from these authorities by means of a blockchain. The blockchain is essentially a decentralized data storage system that is operated and shared via computer network, perfectly tracking all transactions and ‘mining’ of new bitcoins.
This system enables Bitcoin users and investors to circumvent traditional bureaucratic and unreliable institutions such as banks and the aforementioned authorities by means of distributed ledgers, which can’t be tampered with. Other such benefits that follow from this include scarcity (there are a finite number of bitcoins to be mined, with no option for bitcoin-printing ad infinitum), privacy (the blockchain does not track your identity, credit score, etc.), simplicity (there is no need to fill out piles of paperwork for hefty transactions or pay clusters of fees to third-party institutions), and security (because it is entirely virtual, it cannot be stolen off your person, nor can Bitcoin’s blockchain be hacked or modified retroactively). For more information on supposed benefits, read here.
Criticisms of These Claims
Unfortunately, the past couple years in the financial markets have revealed an unpleasant truth: Bitcoin is apparently not nearly as decentralized as it intends to be. Even with no Bitcoin-specific central bank affecting its quantity or value via monetary policy, the value of a bitcoin is nonetheless vulnerable to the decisions of central banks worldwide.
As central banks around the world pulled out all the stops to stimulate their respective countries’ economies during COVID-induced slowdowns, even engaging in quantitative easing en masse to artificially promote lending and buying, Bitcoin’s value soared accordingly. Likewise, as many central banks have begun interest rate hikes and implementing quantitative tightening to quell near-ubiquitous hyperinflation, Bitcoin’s value has plummeted as investors flee risk assets. Thus, both Bitcoin’s all-time high of nearly $69,000 per coin in the fall of 2021, as well as its current drop down to the $20,000 zone, are relatively synchronized with global central bank efforts, particularly those of the US’ Federal Reserve. This behavior strongly indicates that Bitcoin’s price action is indirectly influenced by monetary policy after all, regardless of an innovative blockchain. After all, central banks exist to help control markets, not currencies alone.
Likewise, many of the other alleged perks of Bitcoin are less enticing than they appear at face-value. Regarding its scarcity, a limited supply of anything is not enough to guarantee it has a store of value, especially if demand for it is volatile. Regarding privacy, this may grant a user some comfort, but it is not too helpful here; surveillance states still exist, and you cannot approach the blockchain about refinancing a mortgage. Regarding simplicity, these features can also be interpreted as bugs: easy, peer-to-peer transactions of this kind are a scammer’s dream, and what you avoid paying in fees you might pay exponentially in unrealized/realized losses. Regarding security, these benefits are not particularly special; many consumers don’t carry physical cash around anymore, and banks’ mutable records can enable them to better protect customers from theft and mishaps, even retroactively.
Why It’s Worth Something
Nonetheless, despite all these legitimate concerns and chaotic volatility, Bitcoin is still valuable. How can we tell? Because its price isn’t at zero. This may seem silly, but it is true. For as long as demand for Bitcoin exists, it will always be worth something. It only ought to be recognized that this value is primarily the result of speculation, not fundamentals.
Though Bitcoin’s value will likely continue to depreciate as interest rates rise, consumer spending slows, and the novelty of cryptocurrency wears off in the face of disappointing losses, this is likely not the end of its story. Even as the utopian mythology and bizarre religious language surrounding the crypto movement (hopefully) fade, Bitcoin has historically proven itself as a viable way to make money, if you accept the inherent risk. After all, Bitcoin’s value is contingent upon the desire of institutions and regular Joes to make a quick buck, an intention pervasive throughout most of human history. To expect the value of a bitcoin to soon hit zero seems akin to expecting most casinos to close up shop soon.
How to Trade Safely
The notion of trading Bitcoin safely is a bit of an oxymoron, considering that Bitcoin is arguably one of the most unsafe assets available to own. However, with careful risk management, this is not an issue. Here is my personal approach to trading Bitcoin: 1) Keep your position size small enough that no actual damage can be done to your account, i.e., only purchase what you would feel completely comfortable losing. 2) Opt for holding a position for months or a few years as opposed to day trading, short-term swing trading, or investing. With both day and short-term swing trading, you risk missing out on the longer-term climbs, whereas investing should be reserved for trustworthy securities that have fundamentals which are promising decades down the road. 3) Have fun; at its best, trading Bitcoin has more in common with playing a game than making meaningful financial decisions.
On June 15th, yesterday afternoon, the Federal Reserve released the Federal Open Market Committee’s (FOMC) latest Summary of Economic Projections, coupled with their corresponding statement. They revealed that the FOMC had decided to raise the Federal Funds Rate by a whopping 75 basis points (bps), to a range between 1.5-1.75%; such a hike has not been seen since 1994. Upon this news, and ostensibly in response to Federal Reserve Chair Jerome Powell’s press conference afterwards, financial markets saw a great deal of volatility. The US Dollar Index (DXY) made gains before closing lower at 104.66, while the Dow Jones oscillated between 30,000 and 31,000 before closing slightly higher. Today DXY continues to sink lower as the Dow abandons yesterday’s gains, falling over 800 points intraday, below 30,000. With this context in mind, let’s unpack this as we learn 4 lessons from FOMC yesterday.
1) The Fed is Becoming Increasingly Hawkish
The 75 bps rate hike decision was somewhat shocking. Though an increasing number of analysts began predicting it earlier this week (with speculation about a supposed leak occurring), such an aggressive measure is rare by contemporary standards. Powell made it clear the bold decision was taken in response to May’s hotter-than-expected inflation data, a disturbing 1% CPI increase month-over-month, or 8.6% year-over-year. Though this had not been the FOMC’s intention prior to this information, Powell emphasized that they are willing to roll with the punches and are open to further aggressive measures so long as inflation remains a serious threat.
While he did convey that they will be planning each hike on a case-by-case basis contingent upon inflation reports, he seemed to be signaling that the Fed’s responsibility for price stability must temporarily take precedent over currently maximizing employment, that it might be maximized long-term. This reflects the tone of the hawkish FOMC statement as well, factoring into the aforementioned economic projections, which anticipate increased unemployment, slower growth, and at least a 3% Federal Funds Rate by the end of 2022. While invariably negative news for the stock market, this is perhaps more ambiguous for USD than it appears at face-value, since a seemingly positive hawkish agenda may be undercut by worsening economic expectations.
2) Powell is Unpredictable (Even to Himself)
A generous interpretation of Powell’s decision and rationale is that he reacts swiftly to the latest information. A more cynical interpretation, which some of the questions at the press conference reflected, is that he is fickle and erratic, indicating one set of monetary policy plans before scrapping them for new ones. After all, today’s hawkish FOMC Chairman is nearly unrecognizable from the COVID-era Powell who was fixated on economic stimulus and near-zero interest rates.
However, to Powell’s credit, he is rather self-aware on this matter. He was transparent yesterday about the fact that he is entirely unsure to what extent each rate hike will cool the overheated US economy, particularly in light of pervasive supply chain issues and externalities due to the invasion of Ukraine. These are holistically unusual circumstances, and the FOMC is confined to conducting an ongoing sequence of interest rate experiments to eventually establish an inflation solution. Though honest, this degree of transparency has likely not helped the public or markets gain trust in the Federal Reserve, and thus may have contributed to today’s securities selloffs.
3) Leave Room for Baffling Market Reactions
Upon reading the statement and watching the press conference, the Fed’s intentions left little room for interpretation in my eyes, striking me as hawkish in a clear-cut fashion. While Powell did leave some wiggle room for less aggressive responses if future CPI reports reflect inflation slowing down, he made it quite clear that more 75 bps hikes are on the table, even likely. Taken altogether, all the information provided yesterday appeared overwhelmingly bullish for USD, and bearish for stocks. While yesterday saw another bout of odd buying pressure for stocks upon the rate hike news, today’s decline is unfortunately a more understandable return to form.
However, DXY is down over 1% today intraday as USD plummets in value against other currencies. Despite today’s news on higher-than-expected US unemployment claims, as well as worsening economic conditions according to the Federal Reserve Bank of Philadelphia, this USD outcome has been surprising. Although economic expectations in the US are becoming gradually bleaker as recession fears grow, I had imagined that demand for USD due to huge rate hikes and persistent inflation would have outweighed selling pressure. While I am still anticipating this to be the case, it is helpful to remember that there is no certainty in the markets, and every bullish or bearish signal must be taken with more than a grain of salt.
4) Technical Analysis Still Matters
One factor that likely aided selling pressure for USD was how much buying pressure it had encountered in the days leading up to FOMC, perhaps in anticipation of the suspected 75 bps hike. This bullish momentum reflected in USD pairs, many cases of which led price action to a key level of support or resistance. Touching these levels, in conjunction with how overbought USD was purely from the standpoint of various technical indicators such as the Relative Strength Index and Keltner Channels, was a good recipe for price action reversing course.
This FOMC news is thus a great case study in (seemingly) straightforward fundamentals not exempting traders from having to conduct technical analysis. Even if foreign exchange markets favor USD bulls in the long run, bullish momentum will still almost certainly pause here and there while bears exhaust themselves. If this is the case, such a pause taking place at the intersection between key support/resistance levels and big central bank news was the perfect point to do so.